BUSINESS and its

environment

BUS 001—BUSINESS AND ITS ENIVRONMENT

STUDY PACK DESIGNED FOR JUPEB PROGRAMME
UNIVERSITY OF LAGOS
AKOKA, LAGOS.

KENNETH O. IKENWA M.Sc.

OLUFEMI O. OLAYEMI Ph.D.
DEPT. OF BUSINESS ADMINISTRATION, UNIVERSITY OF LAGOS.
(2016)

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 Table of Contents
Acknowledgments…………………………………………………………...3

Lesson 1: The Nature of Business Activities…………………………………4

Lesson 2: Nature of the Business Environment……………………………...15

Lesson 3: Understanding Business Needs, Success & Failure……………....24

Lesson 4: The Role of the Entrepreneur & Entrepreneurship in the

Economy………………………………………………………….34

Lesson 5: Forms of Measuring Businesses, Types of Economic Sectors &

Forms of Business Organizations………………………………....43

Lesson 6: Stakeholders of a Business………………………………………..53

Lesson 7: Organizational Structure…………………………………………..66

Lesson 8: Centralization, Decentralization & Specialization ……………….76

Lesson 9: Business Communication…………………………………………85

Lesson 10: Local & International Businesses; Privatization &

Nationalization…………………………………………………….95

Solutions to Multiple Choice Questions (MCQs)………………………….107

References……………………………………………………………………108

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 Acknowledgements
We wish to acknowledge the various sources from which ideas and information
have been appropriated to communicate all the explicit knowledge documented
in this study pack. As much as it has been possible, we have credited these
various sources. Where any error of omission is evident in this regard, we wish
to state that they remain unintended and not deliberate.

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 BUSINESS AND ITS ENVIRONMENT

STUDY SESSION 1: THE NATURE OF BUSINESS ACTIVITIES

LEARNING OBJECTIVES: At the end of this lecture the students after an

interactive class session should be able to:

➢ Define business and identify basic elements in a business activity that is

critical in managing risks and maximizing rewards.
➢ Describe accurately the concept of adding value in business
➢ Gain a brief overview of the nature of economic activities
➢ Explain how the concepts of choice and opportunity cost connects with
overall economic performance of businesses

1.1 DEFINITION OF BUSINESS

A few definitions of business appear to be parochial in that they either
overemphasize certain core elements and activities connected to business or de-
emphasize certain core elements and activities that give business a more holistic
connotation and meaning. Let us examine a few definitions of business.

“Business is an organized effort of individuals to produce and sell,

for a profit, goods and services that satisfy society’s needs” (Pride
et al., 2005).

“A business is any activity that seeks to provide good and services to

others while operating at a profit” (Nickels et al., 2005).

“Business involves production and/or exchange of goods and services to earn

profits or in a broader sense, to earn a living. Profit is not the sole objective of
the business. It may have other objectives like promotion of welfare of the

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workers and the general public. Business activities include production and
distribution of goods and services which can satisfy human wants”.

“Business can be defined as any activity or operation which

effectively combines and efficiently utilizes scarce organizational
resources in a competitive environment for the purpose of
producing at a profit, goods and services that meet or exceed the
needs of the society”. (Ikenwa, 2014).
These definitions have embedded in them certain significant elements namely:
• Effectiveness
• Efficiency
• Resources
• Competitive environment
• Profit

The lecturer is expected to discuss the meanings of the concepts item by item by
giving generic or operational definitions of each concept and with relevant
examples relate them to a practical business process or situation. For example:
❖ Effectiveness has to do with a firm’s ability to achieve its predetermined
goals and objectives with a given level of input/resources.
A car manufacturing company ZAC has two truck manufacturing plants.
Plant A is Onitsha and Plant B is in Lagos. In June 2016, each plant got
₦100million with a goal/target to produce 1,000 trucks by the end of 2017.
If Plants A & B achieve this target, both plants will be said to be highly
effective. Where one of both firms fails to achieve the target, they will be
said to be ineffective.

❖ Efficiency has to do with the ability of a firm to achieving its

predetermined goals and objectives with the minimum utilization of
resources/inputs.
If the same car manufacturing company ZKC sets in both the Plant A and
Plant B a goal/target to produce 1,000 trucks by the end of 2017 with the
same ₦100million, and both meet this target by expending a minimum
amount of resources say ₦90million both firms will be said to be efficient.
If Plant B spends ₦95million, it 5will be said to be less efficient than Plant
A.
 ❖ Organizational resources will include: physical, financial, human,
information, and technological resources. However, this is a traditional
way to identify organizational resources. In a more contemporary way,
they are classified as being either: Tangible or Intangible.

Tangible Intangible
• Financial resources • Human resources
• Physical resources • Innovation
• Technological resources • Reputational resources

Would you consider information as a tangible or intangible resource?

❖ A competitive environment is one that determines the success or failure

of an organization given the rivalry that exists between firms in a bid to
capture the same segments of customers in a given market. It can be
otherwise called an industry environment or task environment.

❖ Profit is the excess accruing from a firm’s revenue minus its total cost
(i.e. gross profit) less expenses (i.e. net profit).

1.2 Nature of Business: A business enterprise has the following

characteristics;

(i) Dealing in Goods and Services: The first basic characteristic of a business
is that it deals in goods and services. Goods produced or exchanged may be
consumer goods such as bread, rice, cloth, etc., or capital goods such as
machines, tools, etc., The consumer goods are meant for direct consumption

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either immediately or after undergoing some processes, whereas the capital
goods are meant for being used for the purpose of further production. Capital
goods are also known as producer’s goods. Services include supply of
electricity, gas, water and finance, insurance, transportation, warehousing, etc.

(ii) Production and Exchange: Every business is concerned with production

and exchange of goods and services for value (prices). Thus, goods produced or
purchased for personal consumption (or) for presenting to others as gifts do not
constitute business because there is no sale or transfer for value involved. If, for
example ‘A’ buys a T.V. Set in Lagos to be given to his brother on his return to
Delta, it will not amount to business.

(iii) Regularity and Continuity in Dealings: One sale transaction cannot

strictly constitute a business. A sale of a product can be called a business if it is
undertaken frequently. If other essential characteristics of business are present
and the production of goods or rendering of services for a price is undertaken
regularly and continuously, this activity will be called a business.

(iv) Uncertainty or Risk: Business activities, as we have formed some definite

ideas about it by now, carry an element of uncertainty or risk. It is true that the
element of risk is present in almost all economic activities in a small or great
measure. But it is certainly more significantly present in business activities.
Risk involves the possibility of loss or what may be called uncertainty of return
on investment made in the business due to a variety of factors over which the
business enterprise has practically no control.

(v) Profit Motive: Human-beings are engaged in business primarily with a

view to earn profits and acquire wealth. This is not in any way to reduce the
importance of service motive in business. As a matter of fact, there is a positive

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relationship between proper and satisfactory services to the customers and to the
society and the extent of profit. Normally, better services are accompanied by
higher profits, but it may not always be so. Profit motive is also accepted as a
desirable objective even for the Government enterprises engaged in business. It
is called surplus instead of Profit in case of Government enterprises.

1.3 CONCEPT OF ADDED VALUE

The concept of value has a multidimensional interpretation from different
cycles.

• To the layman for example, value is what he attaches highest emotions

and inclinations to.

• Whereas to the economist, value is what s/he otherwise refers to as

utility, which is the satisfaction derived from consuming a particular
good/service. This value overtime could become marginal and ultimately
diminishes.

• While to the business manager, value is

• “The ability to meet and/or exceed customers’ expectations”.

• These definitions of value are generic and particular to the various

persons mentioned here. They differ entirely in interpretation from the
concept — Added Value.

According to Jim Riley (2009):

Added value = the difference between the price of the finished product/service
and the cost of the inputs involved in making it. So Added Value is the increase in
value that a business creates by undertaking the production process.

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He gives two examples of how a production process can add value:

1. Consider new cars rolling down the production line being assembled by
robots. The final, completed and shiny new car that comes off the
production line has a value (price) that is more than the cost of the sum of
the parts. Value has been added.
2. Consider also a celebrity chef preparing a meal at his luxury restaurant.
Once the cooking is complete, the meal is being served and sold for a
high price, substantially more than the cost of buying the ingredients.
Value has been added.

Added value is determined by the price that a customer pays. Thus, suffices it to
mention that—the concept of added value is different from the concept of profit.

While profit (gross & net) is germane to the total revenue less total costs of
producing the total output of a firm, added value is germane to an individual
unit of a product and the production process involved in transforming it from its
material state to a valuable consumable state which ultimately determines how
much a customer is willing to pay for that unit of the product.

Technically, it is only businesses that add value that are more likely to make
profit.

Businesses according to Riley (2002) can add value through the following:
✓ Building a brand – a reputation for quality, value etc that customers are
prepared to pay for. Nike trainers sell for much more than Hi-tec, even
though the production costs per pair are probably pretty similar!
✓ Delivering excellent service – high quality, attentive personal service
can make the difference between achieving a high price or a medium one.
✓ Product features and benefits – for example, additional functionality in
different versions of software can enable a software seller to charge

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 higher prices; different models of motor vehicles are designed to achieve
the same effect.
✓ Offering convenience – customers will often pay a little more for a
product that they can have straightaway, or which saves them time.

Riley concludes stressing that, “Finding ways to add value is a really important
activity for a start-up or small business. Quite simply, it can make the
difference between survival and failure; between profit and loss.”

1.4 NATURE OF ECONOMIC ACTIVITIES

Economic activities basically describe the production, distribution and
consumption of goods and services that satisfy human wants and needs in a
modern society.

Central Purpose & Characteristics of Economic Activities

The central purpose and characteristics of economic activities according to
Singh (2012) is/are:
(i) To produce goods and services for satisfying human wants.

(ii) Proper allocation of scarce resources so that maximum satisfaction can be

obtained from them.

(iii) Optimum utilisation of land, labour, capital and other factors of production.

(iv) Production of wealth as represented by goods and services.

(v) Economic activities involve creation of utilities.

Thus the critical theme of economic activities is the— IMPROVEMENT OF

ECONOMIC WELFARE. According to Singh (2012), “Welfare of society
can be maximised when best use of resources is made”.

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These production, distribution and consumption activities are underscored and
fuelled by certain economic concepts, principles and laws which guide business
related activities like the concepts of scare resources, choice, opportunity cost,
demand, supply, competition, markets, invisible hand, trade, competitive
advantage of firms and comparative advantage of nations just to mention a few;
all of which help in solving the basic economic problems and resolving the
basic economic issues in a modern society with a view to improving economic
welfare.

These basic problems/issues are addresses by asking three (3) basic questions:

• WHAT TO PRODUCE?
• HOW TO PRODUCE?
• FOR WHOM TO PRODUCE?

To these three basic problems of economics and economies has been added:

❖ HOW ARE SCARE RESOURCES TO BE ALLOCATED?

The quest for the optimal answers to these questions necessitates the application
and the understanding of the principles, concepts and laws previously
mentioned above. But for the purpose of this lecture only the concepts of
Choice & Opportunity Cost will be discussed.

1.4 CONCEPTS OF CHOICE AND OPPORTUNITY COST

All the basic economic problems require that effective decisions are taken so as
to maximize the utilization of scare resources and maximize the output of
production output and thereby increase utilities and wealth creation in a society.

Economic decisions, thus, begin with understanding and applying the concept of
Choice & Opportunity cost.

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There are three types of Goods/Services: Economic goods/services, public
goods/services, free goods/services.
• Economic goods/services—these are scarce and come with an
opportunity cost.
• Free goods/services—these do not carry any opportunity cost.
• Public goods/services—some of these are free, while others come with a
price (subsidy), but whether free or subsidized they come with some
opportunity cost.

Opportunity Cost is, therefore, the alternative in benefits that is forgone for
choice made in favour or a particular resource, good or service vis-à-vis
another. For example, the opportunity cost of studying is to forgo partying,
socializing and loafing. The opportunity of buying a textbook is to give up latest
fashion attire and/or mobile phone.

CLASS EXERCISE

Students should examine government activities and evaluate the

Nigerian economy with a critical analysis using the concepts of
choice and opportunity cost.

Finally, it is important to know the major players in an economy, their goals and
objectives. These are: Individuals, firms and governments all of whom seek
to maximise economic benefits.

❖ Individuals seek to maximize their utility derived from consuming

purchased goods and services.
❖ Firms seek to maximise their profits.

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 ❖ The government seeks the maximum attainment of four key economic
objectives: to have full employment, stable prices, high and sustainable
economic growth and surplus balance of payments.

Self Assessment Questions (SAQs)

1. Explain your understanding of Business.

2. Briefly explain the difference between efficiency and effectiveness.

3. What is Added value? Is there any difference between the concept of

added value and profit?

4. How does a business add values to their products or services?

5. Illustratively explain the concept of choice and opportunity costs.

6. What are the characteristics of economic activities?

7. Enumerate five (5) Characteristics of business.

Multiples Choice Questions

1. Business is an organized effort of individuals to produce and sell, for

………….. goods and services that …………. society’s needs.
a) Margin & benefit b) Profits & benefit c) Premium & meet d) Profits &
satisfy
2. ………………. has to do with a firm’s ability to achieve its predetermined
goals and objectives with a given level of input/resources
a) Efficiency
b) Productivity
c) Effectiveness
d) Performance
3. Businesses according to Jim Riley can add value through the following
EXCEPT
a) Brand name
b) Excellent service

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 c) Technicalities
d) Offering Convenience
4. Who was first argued that the purpose of business was to make profit?
(a) Milton fried man (b) Adams Smith (c) Peter Drucker (d) John Crane
(b)
5. All except ONE of the following are types of goods/services..................
a) Social b) Economic c) Free d) Public

6. The following are services that are rendered by businesses except ……

a) Banking b) Governance c) Insurance d) Transportation
e) Warehousing

7. When goods are produced or purchased for personal consumption (or) for
presenting to others as gifts they often constitute business activity.
a) True b) False

8. Business adding values may not amount to making profit in the long run.
a) True b) False

9. An efficient manager is the most concerned about?

(a)Good products (b) Returns to government (c) Cost minimization (d)

Increased GDP

10. One of the major goals of business is to?

(a) Make money (b)Make profit (c) Make products (d) Make
contributions to government revenue

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 STUDY SESSION 2: BUSINESS AND ITS ENVIRONMENT
TOPIC – THE NATURE OF THE BUSINESS ENVIRONMENT

LEARNING OBJECTIVES: At the end of this lecture the students after an

interactive class session should be able to:

➢ Define business and identify a business environment and its basic

elements.
➢ Explain the nature of the business environment and the factors and forces
that characterize it.
➢ Appreciate the impact of the business environment on business
organizations and how they can adapt to changes in the global business
environment

2.1 DEFINITION OF BUSINESS ENVIRONMENT

Every organization especially those that are business oriented are open systems.
Open systems are organizations that interact with the environment, which they
depend upon for obtaining essential inputs and for the discharge of their system
outputs. Examples of such inputs are: information, human capital, raw
materials, and so on, and outputs and products, services, waste, etc).

The environment of any organization is the, “aggregate of all conditions, events

and influences that surround and affect it” (Davis, 1975).

Elsewhere, the business environment has been defined as:

“All elements that exist outside the boundaries of an

organization that have the potential to affect the organization”
(Daft, 2008).

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The study of the environment is very important since from the definition above,
it is obvious that the environment in which a business operates influences an
organization in multiple ways. The fact is explained by a concept called
environmental determinism which will be explained later.

2.2 CHARACTERISTICS OF THE BUSINESS ENVIRONMENT

The contemporary nature of the 21st century business environment exhibits
certain characteristics which define the interesting trends that we witness in our
everyday interaction in the business world. Let us examine a few of these
characteristics:

According to Kazmi (2002), the business environment has four (4) basic
characteristics.

• Environment is complex – The business environment is complex and

hence very unpredictable. In other words, it is easier to understand it
when studied in parts but difficult when examined in totality.

• Environment is dynamic – The business environment is in a state of

constant change. The various factors and forces which drive change in the
business environment produce outcomes that influence the shape,
structure and behaviour of firms, industries and the entire actors in the
business environment.

• Environment is multi-faceted – the shape and structure a business

environment will assume depend greatly on the perception of the
observer. Thus when change occurs irrespective of the forces or factors
causing and driving change, such incidences will be perceived by
observers from various perspectives.

• Environment has a far-reaching impact – The environment has an

immense impact and effect on firms and organizations in that it

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 determines not only their approach to business operations and response to
competitors and customers, it also determines their survival and
profitability.

Having looked at these four basic characteristics peculiar to the business

environment, it is obvious that one event that is common to the business
environment is change. This makes it is imperative for us to consider some of
the factors that can be referred to as Driving Forces of Change in The 21ST
Century Business Landscape. These factors have come to invent what is now
the referred to as the New Economy. They include but are not limited to the
following:

• Globalization
• Internet
• Workplace Diversity
• Hypercompetition
• Changing Demographics
• Environmental Turbulence
• Technology Revolution
• Deregulation
• Environmental concerns

2.3 SCOPE OF BUSINESS ENVIONMENT

• Domestic

• International These are the various LEVELS/SCOPE at which businesses compete.

• Global

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Domestic Level of Competition: When a firm is carrying on its business
related operations, for example, production, sales, marketing, distribution etc in
a state/country where it commenced its business operations, such a firm will be
said to be competition in a domestic market scope and hence will be referred to
as a domestic firm.

International Level of Competition: When a firm has expanded its business

operations outside the country where it was first registered, into another
country, such a firm will referred as an international firm. As such, its market
scope is international. Examples of such firms are Glo Nigeria Ltd., Access
Bank Ltd., etc

Global Level of Competition: A firm has a global competitive scope when it

carries on its operations across different continents of the world. Most global
firms are also referred to as Multinationals or Transnationals. Examples are
Chevron, Mtn, Microsoft, Coca Cola etc.

2.4 TYPES OF BUSINESS ENVIRONMENT

Business environments exist in dichotomy and the various types of the

environment have variables and factors peculiar to them. The business
environment is divided into the INTERNAL and EXTERNAL business
environment.

The Internal Environment

The internal environment is made up of factors that affect and influence an
organization from within the organization. Note that these internal factors to an
extent are controllable. The major elements in the firm’s internal environment
are: board of directors, management, staff, unions etc.

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The External environment: The external environment is made up of factors
and variables that directly or indirectly affect and influence the business
processes, functions, goals, objectives, strategies, and most importantly
determine the profitability of an organization.
▼Note.

Some external environmental factors to a great extent are not controllable. The
external environment is usually described in dichotomy as: General and task
environment. Both sub-environments could also assume other
descriptions/names as the table below shows:

General Environment Task Environment

Micro environment

Macro environment Industry environment

Remote environment Competitive environment

Uncontrollable environment Operating environment

Indirect-action environment Direct-action environment

Marketing environment

• To reduce ambiguity, the task environment will be referred to as the

industry environment.

2.4.1 General Environment Factors

The acronym PESTLE will be used to improve student’ ability to commit to
memory factors in the general environment. These are:

P-Political
This relates to the various regulatory activities of government which could
either foster or threaten the operations of an organization. Government could at
any time promote or discourage a line of business, or formulate polices that may
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lead to the poor performance or outright closure of a firm or frustrate its
attempts to operate.

E-Economic
The general state of an economy can affect the business operations of a firm or
a group of firms. Economic indexes that are of consequential importance to a
firm include inflation, interest rates, unemployment, standard of living,
exchange rates, balance of payments, savings/investments level etc.

S-Sociocultural
The sociocultural environment is very critical to the strategic operations of a
firm’s. Culture, tradition, beliefs, values, altitudes, lifestyles constitute the
socio-cultural environment. Shifts and alterations in these factors could carry
with them business opportunities as well as threats to a firm’s operations and
profitability.

T-Technology
In our contemporary times, technology has become a major driving force of
industry and business. Thus, if a firm must avoid obsolescence, and promote
innovation, it must be aware of technological changes that might influence its
industry.

L-Legal
Organizations have to cope with conducting their business vis-à-vis the
existence of certain codes, rules and regulations which are statutory and
enforceable by law. They have to operate within the all imposing legal
framework of legislations like company law, foreign exchange regulations, and
consumer protection laws, regulations on products, prices, distribution and
competition.

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2.4.2 Industry environment (Task Environment)
It is important to be very specific in describing the nature of this environment.
The industry environment consists of factors and “forces” that determine the
survival, profitability and competitive advantage of a firm. However, the major
emphasis here is on profitability. Three major groups of people are of
consequence in the industry environment.

• Customers
• Competitors
• Suppliers

2.5 SUMMARY
• The business environment is the basic platform for strategy, strategic
thinking, strategic planning and strategic management.
• The business environment is the major platform for strategy analysis.
• Environmental determinism, therefore, is a perspective which claims that
internal organizational responses are wholly or mainly shaped, influenced or
determined by external environmental factors (Cole & Kelly, 2011).
CLASS EXERCISE

CLASS PARTICIPANTS ARE EXPECTED TO LIST THE MAJOR

FACTORS/ACTORS IN THE TASK/INDUSTRY ENVIRONMENT OF BUSINESS
AND DISCUSS HOW ORGANIZATIONS CAN INFLUENCE THESE ACTORS.

Suppliers………………………………………………………………………………………
…………………………………………………………………………………………………

Competitors……………………………………………………………………………………

…………………………………………………………………………………………………..

Customers……………………………………………………………………………………...
………………………………………………………………………………………………....

Regulators……………………………………………………………………………………..
………………………………………………………………………………………………….

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Creditors………………………………………………………………………………………
………………………………………………………………………………………………….

Self Assessment Questions

1. Itemise the characteristics of Business Environment

2. Distinguish between the internal and external environment of the business

3. Enumerate the general environmental variables known to you.

4. Discuss the relevance of Cultures to business practices in your locality.

5. Identify the driving forces of change in the 21st century.

Multiples Choice Questions

1. Economic indexes that are of consequential importance to a firm include

All except……….. a) Inflation b) Interest rates c) Unemployment d)
Balance of payments e) Divestment

2. --------consist of economic conditions, economic policies, industrial

policies and economic system
(a) Business environment (b) Economic Environment (c) Natural
Environment (d) None
3. PESTLE is an analytical tool which helps to undertake?
(a) An internal analysis (b)) An external analysis (c)A competitor
analysis (d) A strategic analysis
4. An analysis of the external environment enables a firm to identify
(a) Strengths and opportunities (b) Strength and weakness (c)
Weakness and threats (d) Opportunities and threats
5. To determine a country’s attractiveness to business require
(a) A detailed analysis of elements in the macro environment
(b) An assessment of the political and financial risks of doing business
in that country (c) An analysis of the competitive environment (d)
(e) All of the above
6. These are forces in the company’s immediate environment that affect the
performance of the Co. (a) Macro environment (b) Micro environment
(c)Technological environment (d) Natural environment
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7. The environment that recognizes the customs, traditions and value of the
community is known as
(a) Historical (b) Socio-cultural (c) Technology (d) Demographic
8. The scanning of the business environment so as to identify the favourable
and unfavorable conditions therein is ………
(a) SWOT analysis (b) External evaluation (c) Internal Evaluation (d)
Market analysis
9. A Sub culture may be defined as....................................................
(a) A Criminal culture (b) An inferior culture (c) A culture that is
shared by a particular group within the society (d) A cultural practice that
is submerged or hidden
10.Analysing process of change in the Business environment involves
conceptualizing it as (a) Diverse (b) Complex (c) Dynamic (d) Static

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STUDY SESSION 3: UNDERSTANDING BUSINESS NEEDS, SUCCESS
& FAILURE

LEARNING OBJECTIVES: At the end of this lecture students after an

interactive class session should be able to:

➢ Identify the taxonomy of critical business resources

➢ Explore a brief overview of the impact of the business environment on
business resources
➢ Understand factors critical for businesses to succeed and factors that
make businesses to fail.
➢ Propose intelligent strategies and ideas for escaping business failure.

3.1 INTRODUCTION
Organizations are normally structured along the path of some specialization,
business objectives and goals. These usually determine the needs (resources)
that such organizations will require to succeed in their organizational pursuits. It
is these needs/resources that enable organizations to be structured into different
functions so as to achieve the purpose for which they were set up.

These needs are usually generic irrespective of the size, strategy or style and
staff of the organization in question. In addition, these business resources and
organic functions are critical for firms when creating and delivering value. It
therefore, becomes important and imperative for the reader to come to the
knowledge and appreciation of contemporary business needs/resources.
This lecture will examine taxonomy of essential business needs/resources that a
firm is expected to leverage on for it to develop capabilities that will ensure the
firm’s success.

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3.2 DEFINITION OF BUSINESS NEEDS
We define the basic “NEEDS” that firms require succeeding as,
“The critical business resources that must be effectively combined and
efficient utilized by a firm which determines a firm’s ability to create,
deliver and extract value from its operating environment”.
These traditional critical business resources are:

• Human resources

• Physical resources

• Financial resources

• Information resources

• Technology resources

Well, in the previous lecture we examined some driving forces which drive
change in the 21st Century business landscape. Now, suffice to say that, the
knowledge of these resources as they stand will not be adequate in surmounting
the challenges of contemporary business environments.

3.3 CONTEMPORARY TAXONOMY OF ORGANIZATIONAL

NEEDS/RESOURCES

As such we need a new taxonomy of business needs/resources which we divide

into two categories namely: Tangible and Intangible resources.

Tangible resources can be described as hard resources while intangible

resources can be described as soft resources.

Below is an adaptation of taxonomy of resources from the works of J.B.

Barney Hall and R. M. Grant.

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TANGIBLE RESOURCES

Financial Resources - The firm’s borrowing capacity

- The firm’s ability to generate

Internal funds

Organizational Resources - The firm’s formal reporting

structure and its formal planning,

controlling and coordinating systems

Physical Resources - Sophistication and location of a

firm’s plant and equipment

Technological Resources - Stock of technology such as

patents, trademarks, copyrights,

and trade secrets.

INTANGIBLE RESOURCES

Human Resources - Knowledge

- Trust

- Managerial capabilities

- Organizational routines

Innovation Resources - Ideas

- Scientific capabilities

- Capacity to innovate

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Reputational Resources - Reputation with customers

- Brand name

- Perceptions of product quality,

durability and reliability

- Reputation with suppliers

- Reputation with regulators

►You need to Understand that….

• Resources can determine a firm’s ability to succeed or fail.

• Resources are critical to gaining and sustaining competitive advantage.
• Resource utilization identifies the strength and weaknesses of an
organization.

3.4 CLASS DISCUSSION ON BUSINESS FAILURE

Before discussing this topic, the Lecturer would engage the students in an
intellectual interactive session with a view to getting to:

1. Express their conceptualization of business failure

2. Give examples of business firms known to them that have failed

3. Enumerate reasons why these businesses failed

3.5 FACTORS RESPONSIBLE FOR BUSINESS FAILURE—

THEORETICAL EXPLANATION
Before addressing wholesale the subject matter of business failure, it is
important to have a clear cut understanding of the concepts of the Product Life
Cycle, the Organizational Life Cycle of a business organization and the
Economic Business Cycles to be achieved. This will help us understand where
27
and how failure can be understood and predicted at different stages in an
organizations trajectory.

Source: http://www.mrgoodacre.com/plc---product-life-cycle.html

Source: http://thepresidentscouncil.org/wpcontent/uploads/2014/10/lifecycle505w2.jp

28
Source: http://kalyan-city.blogspot.com/2011/06/4-phases-of-business-cycle-in-
economics.html

The different stages in both the Product and Organization Life Cycles indicate
the time frames through which a firm’s product/service offerings and the firm
usually would pass through. These stages have various implications. For
example, a product is most likely to sell more when it is first introduced into the
market. Similarly, when the product has reached its peak in distribution and
circulation, the product is less like to sell and as such the firm will receive less
profit from the product than when the product was first introduced. The concept
applies to organizations, markets and economies as well, with only slight
deviations in explanations. With this knowledge in mind, it is easy to
understand from a theoretical point of view the factors that are responsible for
the failure of firms.

3.6 FACTORS RESPONSIBLE FOR BUSINESS FAILURE—

PRACTICAL EXPLANATION
The theoretical explanations that the organization, product and business cycle
analysis proffer for the purpose of amplifying our understanding of why
businesses fail is adequate but not sufficient in explaining the practical realities

29
faced by businesses, in the turbulent competitive environment, which accounts
for the high incidence of business failure in the global and Nigerian economy.

Owualah (1999) has done an extensive review on the causes of business failure
and provides anecdotal accounts and evidence from empirical research that
discuss from an idiographic point of view factors responsible for business
failure.

But before looking at his work, let us examine the two categories discussed by
Stokes, Wilson & Mador (2010) with regard to issues that may cause the
closure or failure of a business.

External Influences
• Macroeconomic influences - such as interest rates and levels of consumer
demand.
• Localized, microeconomic factors - such changes in demand within the
local catchment area or industry sector especially the loss of a major
customer.
Internal Factors

• Accounting

• Marketing

• Management of people

• Availability of finance

• Management capability and behaviour of the owner

Owualah (199) also itemizes specific causes of business failure or what he

chooses to otherwise describe as “Business Discontinuance” into two
categories.

30
 External Causes Internal Causes

• Adverse economic conditions • Management expenses

• Capital shortage • Marketing

• High interest rates and bank • Personnel

charges
• Technology
• Unfair taxation
• Succession
• High minimum wage
• Scale (size) of operations
• Unstable/unfavourable
government regulation • Fraud
and policies
• Inadequate/poor infrastructure

• Political instability

• Competition

• Natural disaster

Put together, he has identified and discussed in compendium, 12 causes of

small business failure in Nigeria. These are:

1. Inadequate capital

2. Lack of good management

3. Inadequate or lack of functional education

4. Bringing owner’s personal habits into the firm’s affairs

5. Underestimation of competition

6. Poor financial management

7. Employment and over-reliance of relatives

8. Lack of training

31
 9. Inadequate or poor infrastructure

10. Unstable and unfavourable government policies

11. Marketing problem

12. Other issues which include lack of advertising, regular feasibility

studies, dishonesty, fraud and the domino effect.

CONCLUSION

Whatever the causes of business failures, the subject matter of business failure
must be seen from a wider perspective, which focuses on the macroeconomic
effects and impacts that closure of business enterprises will have on a particular
economy. It will be interesting to find out what your thoughts are about some of
these effects.

CLASS EXERCISE

Class participants are expected to consider these effects and discuss and
reflect on how they would impact the Nigerian economic in view of its
pursuit to be among the largest twenty economies in the world by THE
YEAR 2020.

SELF ASSESSMENT QUESTIONS

1. Explain the concept of business needs.
2. Illustratively discuss the business life cycle.
3. What do you understand by business discountenance?
4. Distinguish between external and internal causes of business failure.
5. What are the causes of business failures in Nigeria? How can they be
minimised?

32
Multiple Choice Questions
1. The business life cycle includes all of the following except.........
a) Continuity b) Rebirth c) Decline d) Maturity
2. One of the following is a critical business resource.
a) Technical b) Basic c) Human d) Conceptual
3. All but one of these is a tangible resource.
a) Financial b) Physical c) Innovation d) Technology
4. Examples of technological resources include all but one of the following
a) Patents b) Trademarks c) Copyrights d) Brand name
5. Business failures can be caused by all of these factors except
a) Lack of capital b) Poor infrastructures c) Dishonesty d) Marketing
problem
6. Technology can be described as a ______ resource?
(a)Modern (b)Intangible (c) Contemporary (d)Tangible
7. A firm’s financial borrowing capacity is a ______ resource?
(a)Tangible (b)Intangible (c)Technological (d) Semi-tangible
8. Knowledge can be described as a _______ kind of resource?
(a)Tangible (b) Intangible (c) Technological (d) Semi-tangible
9. Ideas and scientific capabilities can be described as _______ type of
resources?
(a)Tangible (b) Intangible (c)Technological (d) Semi-tangible
10.The brand name of Cadbury is a _______ resource strength?
(a)Tangible (b)Intangible (c) Technological (c)Semi-tangible (d) None
of the above

33
 STUDY SESSION 4: THE ROLE OF THE ENTREPRENEUR &
ENTREPRENEURSHIP IN THE ECONOMY

LEARNING OBJECTIVES: At the end of this lecture, the students are

expected be able to:

✓ Understand the nature, role and the qualities of an entrepreneur.

✓ Appreciate the various intricacies that are peculiar to different methods
of measuring the size of a business enterprise.
✓ Appreciate the significance of social entrepreneurship in an emerging
economy
✓ Appreciate the significance of small businesses in an emerging economy

4.1 INTRODUCTION
The global relevance of entrepreneurs and small business owners/managers has
never been so researched and concentrated on than it has been in the last three
decades or more. The relevance has stemmed from their contributions to market
growth, product innovation and contributions to the achievement of
macroeconomic objectives. In this lecture, we will examine the role of
entrepreneurs and attempt to discuss the nature of business enterprises and how
certain issues pertinent to small business have important effects for an emerging
market economy like Nigeria.

4.2 WHO IS AN ENTREPRENEUR?

The definition of entrepreneurship lacks a common language. We examine a

few definitions of entrepreneurship and then consider some key features that
occur in gamut of definitions in extant literature.

• An entrepreneur is one who creates a new business in the face of risks

and uncertainty for the purpose of achieving profit and growth by

34
 identifying significant opportunities and assembling the necessary
resources to capitalize on them (Scarborough, 2011).
• Entrepreneurs are people who perceive profitable opportunities, are
willing to take risks in pursuing them and have the ability to organize a
business (World Bank).
• An entrepreneur is any person who coordinates other factors of
production and bears the risk of uncertainty by investing his scarce
resources in the business venture (Drucker, 1985).
• An entrepreneur is someone who initiates and actively operates a business
venture (Cunningham & Lischeron, 1991).

For the purpose of this lecture we define an entrepreneur as,

An individual who identifies a need in a business environment, explores

innovative avenues and alternative technologies for satisfying those need and
earns a profit in return.

Whatever the definition accepted and assimilated in the course of this lecture,
an age long fact in the study of business and economics is that—
entrepreneurship is not just a process and factor of production, its ultimate
reward as a factor of production is profit, and this is critical for sustaining the
engine of an economy.

In addition to this statement, it is important to add that, the definition of

entrepreneurship irrespective of the venture the entrepreneur engages will
usually fall into one of the following three dimensions which according to
Wilson & Stokes (2006) are outcomes, behaviours and processes. Let us
examine these dimensions.

35
4.2.1 The Three Dimensions of Entrepreneurship
• Entrepreneurship as a process—entails the set of activities and actions
which individual entrepreneurs undertake in the pursuit of certain
opportunities or business related risks.

• Entrepreneurship as a behaviour— examines the role entrepreneurs’ play

and the specific behavioural traits that characterize these individuals.

• Entrepreneurship as outcomes—focuses on the results of entrepreneurial

ventures. Some of these outcomes may include development of new
products and services, innovations, creation of value for society and so
on.

4.3 TYPES OF ENTREPRENEURS

A gamut of literature suggests that there are different types of entrepreneurs.
We shall however, stick to the typology proposes by Ucbasaran, Westhead &
Wright (2001). According to them, there are five types of entrepreneurs.

Nascent entrepreneur is an individual who is in the process of starting a new

business.

Novice entrepreneur is an individual who has no prior business ownership

experience as a business founder, inheritor of a business, or a purchaser of a
business.

Habitual entrepreneur is an individual who has prior business ownership

experience. (A nascent entrepreneur can either be a novice or habitual
entrepreneur).

Serial entrepreneur is an individual who has sold or closed an original

business, established another new business, sold or closed that business,
established another new business, and continues this cycle of entrepreneurial
behaviour.

Portfolio entrepreneur is an individual who retains an original business and

builds a portfolio of additional businesses through inheriting, establishing or
purchasing them.

Source: Coulter, 2003.

36
Examples of individuals who have succeeded as entrepreneurs are, Bill Gates,
Mike Adenuga, Aliko Dangote, Michael Dell, Femi Otedola, Oprah Winfrey,
Mark Zuckerberg, Jack Dorsey, Jack Ma, Jeff Bezos to mention a few.

4.4 CHARACTERISTICS OF AN ENTREPRENEUR

Timmons (1978), enumerated at least 14 characteristics that entrepreneurs must

possess all of which described what is referred to as the entrepreneurial spirit.

1. Ability to work for longer periods

2. Self-confidence
3. Total involvement
4. Money as a determinant of success
5. Persistent problem-solving
6. Goal setting
7. Risk bearing
8. Dealing with failure
9. Feedback
10.Initiative and personal responsibility
11.Use of resources
12.Competitiveness
13.Internal locus of control
14.Tolerance of ambiguity and uncertainty.

4.4 ROLE OF THE ENTREPRENEUR

Having defined the concept, entrepreneur and highlighted the three dimensions
of entrepreneurship, let us examine some of the roles and functions
entrepreneurs are expected to play and perform in the business environment. Six
roles/functions have been adapted from the works of Inegbenebor (2006) and
Emmanuel (2002).
• Perception and identification of business opportunities
• Identification, selection and acquisition of key resources
• Creativity and innovation
• Risk bearing
• Management of the on-going enterprise

37
 • People and team-building
• Ethical Business Practice

4.5 RANGE AND AIMS OF SOCIAL ENTERPRISES

A very popular trend that continues to saturate and transcend the boundaries of
business initiatives and environments across the global economy is social
entrepreneurship. Social enterprises are the new form of business enterprises
which identify opportunities and transform key resources for the optimal benefit
of society or a specific community and not for anyone single individual or
individuals. According to Witkamp, Raven & Royakkers (2011):

Social entrepreneurship is a new business model that combines a social

goal with a business mentality and is heralded as an important way to
create social value such as sustainability.

It is important to note that social entrepreneurship encompasses both for-profit

and non-for profit ventures. Let us examine a few more definitions of social
entrepreneurship/enterprise.

“A social enterprise is a business with primary social objectives whose

surpluses are principally re-invested for that purpose in the business or in the
community rather than driven by the need to maximize profit for shareholders
and owners”— (Department for Trade and Industry, UK, 2005).

“Social enterprise is a dynamic and inspiring way of doing business. Social

enterprises are innovative, independent businesses that exist to deliver a specific
social and/or environmental mission.” — (socialenterprisescotland.org.uk)

38
“Social entrepreneurship is a process involving the innovative use and
combination of resources to pursue opportunities to catalyze social change
and/or processes” Mair & Martin (2006).

4.6 CHARACTERISTICS OF SOCIAL ENTERPRISES

According to Bland (2006) Social enterprises (SEs) have the following
characteristics:

 Founders and leaders of SEs are passionate about achieving explicit

social or environmental aims.

 Social enterprises compete in the market like any other enterprises.

 SEs often break with conventional business models to find new, more
sustainable ways of improving the world around them.

 SEs are more adept at meeting social and environmental needs. This
mission informs their business approach and strategy.

These characteristics and many more have given rise to the concept known as
the “triple bottom line” in which the three aims of profit, social good and
environmental sustainability are pursued.

4.7 ECONOMIC IMPORTANCE OF ENTREPRENEURSHIP

From the beginning of this course we have defined economic activities as the
production and consumption of goods and services in an economy. Now from
this definition we can appreciate the economic importance of small business
pursuing economic opportunities and activities with the ultimate aim of
achieving macroeconomic objectives of an intelligent government and creating
wealth and improving the welfare of all members of the society.

39
This fact has led to the increased focus on the crucial role that SMEs and
entrepreneurship in general plays in contributing to a country’s economic
growth. It entrepreneurship has been referred to as the engine room of any
economy. We shall enumerate some of the focal important roles of SMEs in
from an economic point of view. We borrow again from Emmanuel (2000),
and Owualah (1999) treatise’ on the subject matter.

• Employment generation
• Conservation of foreign exchange
• Promotion of effective resource distribution
• Equitable distribution of wealth
• Maintenance of Competition & Competitiveness
• Transformation of traditional/indigenous industry

CONCLUSION
The importance of entrepreneurs and entrepreneurship to an economy has
highlighted in this chapter. It is no gainsaying the fact that strong economies are
built on entrepreneurship. A new dimension in the entrepreneurship discourse
has emerged, i.e., social entrepreneurship. It is hoped that the student will build
a knowledge base around all the issues discuss in this lecture and consider how
they contribute to economic value addition.

SELF ASSESSMENT QUESTIONS

1. Who is an entrepreneur?
2. Identify three dimensions of entrepreneurship.
3. Enumerate the different types of entrepreneurship known to you.
4. Identify and discuss characteristics of entrepreneurship known to you.
5. Discuss six functions of entrepreneurship.
6. Briefly explain social enterprise and its characteristics.
7. In the concept of entrepreneurship, what constitutes an opportunity?

40
 8. Identify and discuss at least five (5) essence of entrepreneurship known to you.
9. Why is Nigerian government encouraging and introducing the teaching of
entrepreneurship development in tertiary institutions?
10. Do you think government efforts toward entrepreneurship development in Nigeria are
adequate? What are your reasons?

Multiple Choice Questions

1. Dangote and Adenuga are known as ………… entrepreneurs
(a) Start up (b) Local (c) Serial (d) Role models (e) All of the above
2. The process of “creative destruction” states that entrepreneurs are a force
for change.
a) False b) True
3. Advantages of entrepreneurship include autonomy, the challenge of a
start-up, and more control over personal finances.
a) False b) True
4. Entrepreneurs often work long hours resulting in a strain on family
relationships.
a) False b) True
5. Early definitions of entrepreneurs were developed by
a. marketing experts. b. management experts. c. economists.
d. personnel managers.
6. The concept of “creative destruction” states that
a. entrepreneurs are a force for change.
b. entrepreneurship has an uncertain financial return.
c. entrepreneurs must risk financial capital.
d. entrepreneurs have unique personality traits.
7. Entrepreneurial activities include
a. starting a new business based on a new concept.

41
 b. starting a new business based on an existing concept.
c. buying an existing business. d. all of the above.
8. If someone starts a convenience food store, this is an example of a(n)
a new concept/new business. b. existing concept/new
business.
c. existing concept/existing business. d. new concept/existing
business.
9. What is the process by which individuals pursue opportunities without
regard to resources they currently control?
a. Startup management
b. Entrepreneurship
c. Financial analysis
d. Feasibility planning
10.Which one of the following is the process of entrepreneurs developing
new products that over time make current products obsolete?
a. New business model
b. Anatomization
c. Creative destruction
d. None of the given options

42
 STUDY SESSION 5: FORMS OF MEASURING BUSINESSES; TYPES
OF ECONOMIC SECTORS & FORMS OF BUSINESS
ORGANIZATION

LEARNING OBJECTIVES
At the end of this lecture, the students are expected to be able to:
✓ Appreciate the various intricacies that are peculiar to different methods
of measuring the size of a business enterprise.
✓ Explain the various forms of legal business organizations.
✓ Discuss the various economic sectors in an economy and clearly identify.
what kind of business and non-business activities belong to which sector.
✓ Appreciate the significance of small businesses in an emerging economy

5.1 INTRODUCTION
This lecture is a continuation from the last lecture which looked at the roles of
an entrepreneur and other related issues within the discussion of the learning
objectives as highlighted. We continue by examining the different ways of
measuring the size of a business, different types of business organizations and
finally the benefits of small businesses and their contributions to an economy.

5.2 METHODS OF MEASURING BUSINESS SIZE

To the layman, a business can be measured at the face value looking at the size
of the company’s structure or physical facilities, geographical market scope
within which its products and/or services can be located, bought and transacted
and so on. However, it is important for the student to have a thorough grasp on
the key indices for measuring the size of a business. These are enumerated and
discussed briefly below.

• Number of employees
• Capital Invested in the business
• Sales Turnover

43
 • Market Capitalization (Stock Market Valuation)
• Market share

1. Number of employees
The number of employees employed by a firm may not be an actual
representation of its size. For example, business that are more capital intensive
than labour intensive may have few employees but may actually be big in terms
of market scope and their economies of scale or clientele base. For example a
technology service firm like an Internet Service Provider (ISP) may have a few
employees but could have more than 10million customers in its subscriber base.
This is just an example of an exception. Generally, businesses with large
employees are considered to be large and those with few employees considered
to be small.

2. Capital Invested in the business

The capital employed in starting and running a business enterprise usually is an
indicator of the size of that business. A firm which employs a large amount of
capital will be considered big while the reverse will be the case. However,
capital employed may not necessarily translate to a large or small number of
employees just as the case with the technology firm discussed in the previous
example.

3. Sales Turnover
The total revenue of a firm is a good indicator of the size of a business.
However, it could be misleading because a business which is indeed small in
nature may over a period of time earn large revenue/income from its sales at a
given point in time. For example a small supermarket may during the festive
season record high sales turnover; this does not qualify it to be a big business
enterprise.
44
4. Market Capitalization (Stock Market Valuation)
This measure is only used to evaluate businesses that are listed on the stock
exchange of a particular country. It is usually calculated using the formulae:

Market capitalisation = current share prices X total number of shares issued

The indicator is not very not stable given the fact that stock/share prices change
from time to time especially during the various shifts in the product,
organization or economic cycles.

5. Market share
A business firm which enjoys good patronage in a given market will be
assumed to have a major or significant market share in that geographical market
scope/domain. The share of a firm in the market is calculated by the formulae:

Total sales of business X 100

Total sales of industry

It is important to note that a firm could be large/big but may not at a given point
in time enjoy a major share of the market. What can be the reason for this?

CRITICAL THINKING
Students are expected to examine these factors and discuss in an
interactive section what they consider may be problems associated
with the use of the indicators as measures of the size of a business.

5.3 CLASSIFICATION & CATEGORIES OF SECTORS IN THE

ECONOMY
All types of business enterprises whether existing for-profit or not-for-profit
engage in productive operations which qualifies them to be classified and

45
categorized under a particular sector in any economy. Combined, these sectors
number five: Primary, secondary, tertiary, public and private sectors.

The primary sector of the economy is the sector of an economy which involves
those activities that relate to the direct extraction and use of natural and mineral
resources. This includes agriculture, forestry, fishing and mining. The primary
sector is usually most important in less developed countries, and typically less
important in industrial countries. Primary sector is usually the larger sector in
developing or less developed countries. For example, animal husbandry,
subsistence farming, is more common in Africa than in Japan, America, and
Britain etc. This is not to say, however, that these forms of occupational
economic activities do not exist in developed countries.

The secondary sector of the economy on the other hand is usually involved in
the production and manufacturing of goods from the transformation and
processing of raw materials which are usually obtained from the primary sector
or sourced from abroad. The manufacturing sector is usually larger in developed
countries than in developing countries and is a major sector that contributes to
economic growth of a country.

The tertiary sector of the economy has to do with the provision of services in a
particular country. Services like transportation, banking, tourism, retailing, and
information and communication technology all belong to the tertiary sector of
the economy.

Finally, any firm engaged in these activities would usually fall under the
category of the public sector or private sector. (The student should look up the
Internet for a list of enterprises in Nigeria and identify which category of sectors
they belong to e.g. University of Lagos, Guaranty Trust Bank, Lagos Inland

46
 Revenue Service, Shell Nigeria Ltd, National Library of Nigeria, Nollywood,
Bowen University, etc.)

5.4 FORMS OF BUSINESS ORGANIZATION

Business organization usually is characterized by certain forms which confers
upon them a legal status to operate as a going concern. According to
Emmanuel (2000), in deciding a business, the entrepreneur should make his or
her choice from the list of business forms available considering their advantages
and disadvantages. A large proportion of her work will be used for the purpose
of discussion in this sub-section.
The following forms of business organizations are thus available for the
entrepreneur to choose from:
Sole Proprietorship
A sole proprietorship is a simple form of business most owned by a single
individual who bears the entire risks associated with the business. According to
Pride et al. (2005), sole proprietorships are most common in retailing, service
and agriculture. Some peculiar characteristics of sole proprietorships include: (i)
The business is self-managed by the owner, (ii) the sole proprietor is
responsible for all the assets and liabilities of the business, and (iii) risks is
borne by the owner alone.
Advantages Disadvantages
1. Capital can be easily raised 1. The business is more prone to failure
2. Starting up is flexible and folding up than any other form of business
the business is easily flexible 2. High levels of risks are associated
3. It is a less taxed form of business as with the business
most of the profits are considered as 3. Most proprietorships suffer for lack of
personal income continuity

47
Partnership
Partnership as defined by the Partnership Act of 1890 in Section1(1), is “a
relationship that subsists between two or more persons, coming on a business in
common view of making profit” (as cited in Emmanuel, 2000). There are
generally two types of partnerships, general partnership and limited
partnership.

In a general partnership, the partners all share in the responsibility of operating

the business, and the liability of partners is unlimited. However, in a limited
partnership, the partner(s) may decide to limit their liability in the business, and
as such do not partake actively in the business. In addition to these two types of
partnerships, Nickels et al. (2005) discuss two more: Master Limited
Partnership (MLP), and Limited Liability Partnership (LLP).

According to Nickels et al. (2005), MLP is a partnership that looks like a

corporation (in that it acts like a corporation and is traded on the stock
exchange) but is taxed like a partnership and thus avoids the corporate income
tax. While the LLP is a partnership that limits partners’ risk of losing their
personal assets to only their own acts and to the acts and omissions of the
people under their supervision.

Advantages Disadvantages

1. Partnership have more financial 1. Death of a partner can translate

resources available into the end of the business

2. Partnership easily build synergy 2. It is difficult to terminate

as a result of shared resources partnership agreements
and shared pool of knowledge
3. Most partnership investments
3. Partnerships enjoy more tax could be frozen because it is not
benefits than limited liability

48
 companies easy to get out of partnership

4. Partnerships survive longer than 4. Disputes among partners can

sole proprietor easily truncate business
operations

Co-operative Society
A co-operative society is an association of a group of people who pool
resources together to engage in a business transaction for profit-making, but
mainly for the benefits of the members (Emmanuel, 2000). Profit is usually
shared based on the participation of members and their contributions. According
to Emmanuel (2000), co-operative societies can be:
• Producers Co-operative Society
• Thrift Co-operative
• Trading Co-operative
• Consumers’ Co-operative Society

Advantage Disadvantage
1. It is easy to raise funds 1. Elections into executive
2. Co-operatives are not subject to positions are usually challenging
tax on their profits 2. Co-operatives usually have
3. Co-operatives are very corporate governance problems
protective of members interests 3. Some co-operatives are usually
challenged by economic cycles

49
Limited Liability Company (LLC)
Limited liability companies or corporations as they are sometimes called can
simply be defined as organizations that are incorporated as a requirement by law
to manage and operate certain kinds of business and or execute certain kinds of
projects. Emmanuel defines it as, “a legal entity that has perpetual
succession…which can be incorporated by shares, guarantee, or with unlimited
liability”.

Advantages Disadvantages
1. Shares of a LLC are transferable 1. LLC are usually come with high
from one individual to another capital demands to maintain
2. LLC unlike partnerships and operations
sole proprietorships have a 2. The nature of LLC makes them
perpetual life susceptible to double taxation
3. To a great extent, LLC have from multiple government
good separation of owner from agencies
management structures which 3. The size of LLC in the long run
required for good corporate could compromise management
governance. efficiency

CLASS INTERACTIVE
What are the benefits of each kind of business organization to an
entrepreneur and when should each be adopted?

CONCLUSION
The importance of entrepreneurship cannot be overemphasized. As we can
glean from the series of discussion on the subject, it is very critical in

50
stimulating economic activities that translate into economic growth and
eventual development.

Self Assessment Questions

1. Identify and discuss five (5) key indices for measuring the size of a
business.
2. Briefly discuss the various classification of economy sectors with
relevant examples
3. John Okon is a retiree who intends to float a small business of his own.
On sharing his thought with his friends, Ngozi Obi and Akin Olu, it was
suggested that they jointly float a common business instead. Mr Okon is
confused about the right option to choose, either to do it alone or heed to
his friend’s proposal. You are required to explain the features of both
business options to Mr Okon and advice him appropriately on which
option to choose.

Multiples Choice Questions

1. The maximum number of shareholders allowed in a Public Limited Company
is?
(a) 20 (b) 50 (c) 100 (d) No maximum number (e) none of the above
2. One disadvantage of forming a Partnership is?
(a) The number of Partners is limited (b) Specialist skills may be introduced
(c) More Financial Capital is usually available (d) Any Financial Losses
must be shared (e) None of the above
3. Limited Liability means?
(a) A firm is unlikely to go bankrupt
(b) Shareholders cannot be asked to pay for the company debts
(c) The organisation is either a Private or Public company

51
 (d) Employees are insured against accidents at work
(e) None of the above
4. Which is not a form of business ownership in the private sector?
(a) A Partnership (b) The National Health Service (c) A Sole Trader
(d) A Public Limited Company (e) None of the above
5. The form of business organization that has the largest sales volume is the:
(a) partnership (b) corporation (c) cooperative (d) Multinational (e) none of
the above
6. The simplest form of business ownership is a:
(a) proprietorship (b) partnership (c) corporation (d) cooperative (e) none of
the above
7. Which of the following is an advantage of a sole proprietorship?
(a) ease of starting a business (b) being your own boss (c) pride of ownership
(d) all of the above (e) none of the above
8. The main disadvantage of a general partnership is:
(a) the unlimited liability of the partners (b) disagreement amongst partners
(c) shared management (d) difficulty of termination (e) none of the above
9. A ___________ is a business with two or more owners:
(a) corporation (b) conglomerate (c) partnership (d) public corporation
(e) none of the above
10. A partner who is not actually involved in the partnership but lends his name
for public relations purposes is a: (a) silent partner (b) general partner (c)
nominal partner (d) dominant partner.
(e) none of the above

52
 STUDY SESION 6: STAKEHOLDERS IN A BUSINESS

LEARNING OBJECTIVES
At the end of this lecture, the students are expected be able to:
✓ Identify the groups that are important to firms’ operations in their
business environment.
✓ Appreciate the importance of stakeholders to the performance of a
business firm.
✓ Properly classify stakeholder groups into different categories.
✓ Gain a clear-cut understanding of how stakeholder conflicts can be
resolved.
6.1 INTRODUCTION
Business environments all over the world are usually influenced by certain
groups of individuals or institutions who can exert influences that determine the
operational excellence, profitability, survival and failure of a firm or industry in
a particular environment. This results from the fact that the operations of such
firms or industry can possibly have a direct or indirect influence on these groups
or institutions thereby. These groups are referred to as—stakeholders. In this
module we attempt to examine the importance of such with respect to their
roles, rights and responsibilities, as well as the various means through which
conflicts between such groups can be resolved.

6.2 DEFINITION OF STAKEHOLDER(S)

Let us examine a few definitions of stakeholder’ concept.

“Stakeholders can be defined as individuals or group of individuals who have a

stake in or are significantly influenced by an organization’s and who in turn, can
influence the organizations”(Coutler, 2003).

“A stakeholder may be anyone, even the community who has an interest in the
company, direct or indirect”—(Morrison, 2006).

53
A stakeholder is any individual or group who affects or is affected by the
organization and its processes, activities and functioning” (Caroll & Nasi,
1997).

6.3 TYPES OF STAKEHOLDERS

There are different types of stakeholders. However, a discussion on this topic
without a detailed breakdown on the various distributions of stakeholders into
groups/categories would amount to doing injustice to the subject matter. Let us
consider the various classifications.

1. Normative & Derivative Stakeholders

According to Phillips (2003a) stakeholders can first of all be viewed with the
taxonomy that enables them to be identified either as Normative or Derivative
Stakeholders.

Normative Stakeholders These are stakeholders for whose benefit a firm is

to be managed and carries on a business.

Derivative Stakeholders These are stakeholders who have the potential to

affect an organization and its normative
stakeholders.

2. Direct & Indirect Stakeholders.

Morrison (2006) proposed a model which depicts different categories of
stakeholders belonging to the direct or indirect category of stakeholders.
Direct stakeholders are those who may be directly involved in the activities
of the firm; who may have a direct impact on the firm; or who may be directly
impacted or affected by the activities and operations of a firm.

While indirect stakeholders are those who though may not be directly
involved in the firm’s operations do have an indirect impact on the operations
of a firm and can also be indirectly impacted or affected by the firm’s

54
activities and operations. According to Morrison (2006), indirect stakeholders
usually represent a broader range of societal interests.

3. Internal or External Stakeholders

Whether a stakeholder group will be classified as internal to the firm or
external to the firm will depend on a clear cut understanding of the taxonomy
and categories of stakeholders discussed above. To identify which group falls
into the former and latter classification a list of stakeholders groups to a firm
will be given below and a small mental exercise will be engaged to pinpoint
which stakeholder belongs to which taxonomy.

Traditionally, a firm’s stakeholders which can be found listed in any

contemporary business management text will include the following:

• Customers
• Employees
• Shareholders
• Board of Directors
• Management
• Suppliers/ Distributors
• Local Community/Society
• Government
• Trade Unions
This list has over the years seen an expansion and added to it are:
• Consumers
• Regulators
• Ecological environment
• Creditors (Financial institutions)
• Competitors
• NGOs

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From the above notes, it can generally be construed that, the term stakeholder
refers to persons and groups that affect, or are affected by, an organization’s
decisions, policies, and operations. The word stake, in this context, means an
interest in or claim on a business enterprise. Those with a stake in the firm’s
actions include such diverse groups as customers, employees, stockholders, the
media, governments, professional and trade associations, social and
environmental activists, and nongovernmental organizations. The term
stakeholder is not the same as stockholder, although the words sound similar.
Stockholders individuals or organizations that own shares of a company’s stock
are one of several kinds of stakeholders. Business organizations are embedded
in networks involving many participants. Each of these participants has a
relationship with the firm, based on ongoing interactions. Each of them shares,
to some degree, in both the risks and rewards of the firm’s activities. And each
has some kind of claim on the firm’s resources and attention, based on law,
moral right, or both. The number of these stakeholders and the variety of their
interests can be large, making a company’s decisions very complex, as the
Walmart example illustrates.

Managers make good decisions when they pay attention to the effects of their
decisions on stakeholders, as well as stakeholders’ effects on the company. On
the positive side, strong relationships between a corporation and its stakeholders
are an asset that adds value. On the negative side, some companies disregard
stakeholders’ interests, either out of the belief that the stakeholder is wrong or
out of the misguided notion that an unhappy customer, employee, or regulator
does not matter. Such attitudes often prove costly to the company involved.
Today, for example, companies know that they cannot locate a factory or store
in a community that strongly objects. They also know that making a product
that is perceived as unsafe invites lawsuits and jeopardizes market share. A few
other themes related to stakeholder discussions are:

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Stakeholder Analysis
An important part of the modern manager’s job is to identify relevant
stakeholders and to understand both their interests and the power they may have
to assert these interests. This process is called stakeholder analysis. It asks four
key questions, as follows. But stakeholder analysis involves more than simply
identifying stakeholders; it also involves understanding the nature of their
interests, power, legitimacy, and links with one another.

Stakeholder Interests
What are the interests of each stakeholder?
Each stakeholder has a unique relationship to the organization, and managers
must respond accordingly. Stakeholder interests are, essentially, the nature of
each group’s stake. What are their concerns, and what do they want from their
relationship with the firm?

Stockholders, for their part, have an ownership interest in the firm. In exchange
for their investment, stockholders expect to receive dividends and, over time,
capital appreciation. The economic health of the corporation affects these
people financially; their personal wealth and often, their retirement security is at
stake. They may also seek social objectives through their choice of investments.
Customers, for their part, are most interested in gaining fair value and quality in
exchange for the purchase price of goods and services. Suppliers, likewise, wish
to receive fair compensation for products and services they provide. Employees,
in exchange for their time and effort, want to receive fair compensation and an
opportunity to develop their job skills. Governments, public interest groups, and
local communities have another sort of relationship with the company. In
general, their stake is broader than the financial stake of owners, customers, and
suppliers. They may wish to protect the environment, assure human rights, or

57
advance other broad social interests. Managers need to understand these
complex and often intersecting stakeholder interests.

Stakeholder Power
What is the power of each stakeholder?
Stakeholder power means the ability to use resources to make an event happen
or to secure a desired outcome. Experts have recognized four types of
stakeholder power: voting power, economic power, political power, and legal
power. Voting power means that the stakeholder has a legitimate right to cast a
vote. Stockholders typically have voting power proportionate to the percentage
of the company’s stock they own. Stockholders typically have an opportunity to
vote on such major decisions as mergers and acquisitions, the composition of
the board of directors, and other issues that may come before the annual
meeting.

Customers, suppliers, and retailers have economic power with the company.
Suppliers can withhold supplies or refuse to fill orders if a company fails to
meet its contractual responsibilities. Customers may refuse to buy a company’s
products or services if the company acts improperly. Customers can boycott
products if they believe the goods are too expensive, poorly made, or unsafe.
Employees, for their part, can refuse to work under certain conditions, a form of
economic power known as a strike or slowdown. Economic power often
depends on how well organized a stakeholder group is. For example, workers
who are organized into unions usually have more economic power than do
workers who try to negotiate individually with their employers.

Governments exercise political power through legislation, regulations, or

lawsuits. While government agencies act directly, other stakeholders use their
political power indirectly by urging government to use its powers by passing

58
new laws or enacting regulations. Citizens may also vote for candidates that
support their views with respect to government laws and regulations affecting
business, a different kind of voting power than the one discussed above.
Stakeholders may also exercise political power directly, as when social,
environmental, or community activists organize to protest a particular corporate
action.

Finally, stakeholders have legal power when they bring suit against a company
for damages, based on harm caused by the firm, for instance, lawsuits brought
by customers for damages caused by defective products, brought by employees
for damages caused by workplace injury, or brought by environmentalists for
damages caused by pollution or harm to species or habitat. After Enron
collapsed, many institutional shareholders, such as state pension funds, joined
together to sue to recoup some of their losses.

Stakeholder Coalitions
An understanding of stakeholder interests and power enables managers to
answer the final question of stakeholder analysis: How are coalitions likely to
form? Not surprisingly, stakeholder interests often coincide. For example,
consumers of fresh fruit and farm workers who harvest that fruit in the field
may have a shared interest in reducing the use of pesticides, because of possible
adverse health effects from exposure to chemicals. When their interests are
similar, stakeholders may form coalitions, temporary alliances to pursue a
common interest. Stakeholder coalitions are not static. Groups that are highly
involved with a company today may be less involved tomorrow. Issues that are
controversial at one time may be uncontroversial later; stakeholders that are
dependent on an organization at one time may be less so at another. To make
matters more complicated, the process of shifting coalitions does not occur
uniformly in all parts of a large corporation. Stakeholders involved with one

59
 part of a large company often have little or nothing to do with other parts of the
organization.

In recent years, coalitions of stakeholders have become increasingly

international in scope. Communications technology has enabled like-minded
people to come together quickly, even across political boundaries and many
miles of separation. Cell phones, blogs, e-mail, faxes, and social networking
sites have become powerful tools in the hands of groups that monitor how
multinational businesses are operating in different locations around the world.

Note: It is very important to note that not all firms will have the same number
of stakeholder groups who have similar interest. For example, a university is
not expected to have the same set of stakeholder groups that a bank is expected
to have. Similarly, a Pharmaceutical company will have a different set of
stakeholder groups from an automobile manufacturing firm. The
differentiating factor here is that the line or nature of business will usually
determine the set of stakeholder groups that a firm will have even though some
may share the same set of stakeholders given the fact that they operate within
the same business environment.

CLASS EXERCISE
Now let us attempt to identify correctly which STAKEHOLDER GROUPS
falls into which taxonomy going by the explanations above.

Stakeholders Normative Derivative Direct Indirect Internal External

1 Customers
2 Employees
3 Shareholders
4 Board of Directors
5 Management
6 Suppliers/ Distributors
7 Local

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 Community/Society
8 Government
9 Trade Unions
10 Consumers
11 Regulators
12 Ecological environment
13 Creditors (Financial
institutions)
14 Competitors
15 NGOs

6.4 ROLES, RIGHTS & RESPONSIBILITIES OF STAKEHOLDERS

Now that we have identified all the possible stakeholders groups that are
involved directly or indirectly to the activities of a firm, let us proceed to
examine in synopsis the general roles and responsibilities of stakeholders to a
business. However, it is necessary to mention that, each stakeholder group
performs specific roles and has certain responsibility to the firm or industry of
interest and these are usually accompanied with certain stakeholder’s rights as
well.

1. Give direction to management

2. Contribute to effective decision making

3. Ensure the provision of an enabling environment for business operations

4. Ensure a firms’ proper utilization of resources

5. Performance of oversight functions like project monitoring, feedback, etc

6.5 CONFLICT RESOLUTIONS AMONG STAKEHOLDER GROUPS

So far we have shown that stakeholders are pivotal to the success of any
business even though most firms try as much as possible to undermine
stakeholders’ activities for the purpose of protecting the empire building and

61
profit maximizing interest of the firm’s owners and managers. This is just one
example of how conflicts arise between stakeholder groups. In this section, we
shall examine techniques that can be used for resolving such conflicts.

Cotter (2013) discusses five (5) techniques for resolving stakeholders’

conflicts. These are: Competing, Collaborating, Compromising,
Accommodating and Avoiding (as Adapted from Thomas-Kilmann’s
Conflict Mode Instrument -TKI).

1. COMPETING
This involves the resolution of conflict by first and foremost satisfying the
needs and protecting the interest of one’s own stakeholder group at the
expenses of others as can be seen from the example stated above which
often leads to managerial opportunism and empire building.

2. COLLABORATING
This involves seeking the benefits of parties that have collective interests in
a particular firm. For example, employee unions collaborating with
shareholders to enforce a particular course of action for management to
undertake.

3. COMPROMISING
This occurs when parties involved in a stakeholders’ conflict decide to give
up something of particular value or interest in order to arrive at a truce that
will remove the negative impact of the conflict on the stakeholders
involved.

4. ACCOMMODATING
Resolving conflicts among stakeholders’ occur when a particular group(s)
decides to emphasize the interest of the other stakeholder group(s) above
theirs e.g. when the management of a firm decides to take a pay-cut and
increase the salaries of junior employees and dividends of shareholders.
62
 5. AVOIDING
This style is adopted when conflicts are resolved within groups either by
avoiding or suppressing them. It is synonymous to the compromising
technique.

CONCLUSION

The importance of stakeholder relationship and management cannot be

overemphasized especially in view of the fact that the stakeholder performance
is a growing metric for evaluating the overall performance of a firm. In this
lecture we have been able to substantiate these facts and enlarge the
knowledge horizon on stakeholder groups and mechanisms for resolving
stakeholder conflicts.

SELF ASSESSMENT QUESTIONS

1. Who are stakeholders? Mention and explain the interests of at least five
(5) stakeholders in any business organisations of your choice.

2. Distinguish between normative and derivative stakeholders.

3. Enumerate the various categories of stakeholders known to you

4. Discuss the extent to which stakeholder’s power can be exercised

5. Identify and explain five (5) techniques for resolving stakeholders

conflicts

Multiple Choice Questions (MCQs)

1. The process by which companies identify the most important stakeholder

is called;
a) Stakeholder importance evaluation b) Stakeholder impact analysis
c) Stakeholder impact evaluation d) Stakeholder analysis
2. Dissatisfied stakeholders may behave in which of the following ways;
63
 a) Remain Loyal to the organisation b) Leave the organisation
c) Seek to change things in the organisation d) Answers A & B e)
Answers B & C
3. To business organisations, the term stakeholder means which of the
following;
a) All those interested in working for the company
b) All those who have interest in the company
c) All those parties which the company does business with
d) Board of directors
e) Shareholders of the company
4. The internal stakeholders of a company exercise their power via which of
the following;
a) Their position within the company
b) Their control of resources
c) Their personal influence
d) Their knowledge and skills
e) All of the above
5. A “key player” is a stakeholder with which of the following;
a) Low interest and low power
b) Medium interest and high power
c) High interest and low power
d) High interest and high power
e) Medium power and medium interest
6. In order to effectively manage its stakeholders, an organisation should
map them out according to which of the following;
a) Shareholding status and position in the organisation
b) Shareholding status and level of interest
c) Level of power and interest

64
 d) Power and personality
e) None of the above
7. _______ is not a technique for handling conflict?
a) competing b) coaching c) accommodating d) collaborating
8. All the parties in Company XYZ agreed of an impending resource
allocation issue to seek each others benefits and interests. This is a _____
type of conflict resolution technique?
a) competing b) coaching c) accommodating d) collaborating
9. Stakeholders are expected to?
a) Give direction to government b) Give direction to management c)
Give direction to gender activists in a firm d) Give direction to the
community a firm operates
10. Normative stakeholders are stakeholders ______?
a) For whom the firm exist b) For whose benefits a firm is managed
c) Directly involved in a firm d) Who demand CSR activities from a
firm

65
 STUDY SESSION 7: ORGANIZATIONAL STRUCTURE

LEARNING OBJECTIVES: At the end of this lecture, the students are

expected be able to:
✓ Understand the meaning of organization structures and their importance
to business operations.
✓ Clarify between the concepts of formal & informal organization.
✓ Grasp the concepts of centralization, decentralization and specialization.
✓ Apply the knowledge gained from the lecture to business case analysis.

7.1 INTRODUCTION
Businesses irrespective of their size, scope and scale need to be properly
structured for effective operations which is critical to positioning such firms for
efficient utilization of resources. To achieve this, it is appropriate for business
students at their introductory stage into business studies to get a clear and
holistic grasp the nature of business organizations, the different traditional types
of business structures, their characteristics, merits and demerits.

7.2 NATURE, PURPOSE AND CONCEPT OF ORGANIZATION

Definition of Organization
An organization consists of a group of people, organized to perform different
tasks, which is coordinated in order to contribute to the attainment of set
organizational goals and objectives.

Nature of an Organization
By the nature of an organization, this implies the basic components/elements
inherent in any organization. These are the defining features of an organization
irrespective of the size, scope or scale of its operations. These elements are:
• Division of work
• Facilities (tool & technology)

66
 • Workers (Personnel)
• Delegation of Authority

Purpose of Organization
The purpose of an organization will depend on the form of organization i.e.
whether it is a Formal Organization or an Informal Organization. In the course
of the lecture note the differences between both forms of organization shall be
discussed.

7.3 TYPES OF ORGANIZATION

There are basically two types of organization as highlighted above. But for the
avoidance of conceptual ambiguity we shall refer to these two as forms of
organization. These are formal and informal organization.

7.3.1 FORMAL & INFORMAL ORGANIZATION

A formal organization is a mechanistic structure built into an organization
which defines and establishes positions, responsibility, authority, accountability,
roles and chain of command within the organization. A formal organization is
intentionally created to enable the personnel of a firm coordinate their different
tasks with less friction in order to attain predetermined goals.

An informal organization is an organic structure created as a result of the

interplay of social interaction and interpersonal relationships that
simultaneously and naturally occur within and outside the formal organization
structure. The diagram below depicts the formal and informal representation of
relationships and structures in an organization.

An informal structure is not usually established by management and is not

recognized because management pretends not to be aware of its existence.
Though unrecognized, Chandan (1987) posits that, “it exist in the shadow of
67
the formal structure as a network of relationships and social relations, and must
be understood and respected by the management”.

7.3.2 ROLES OF FORMAL & INFORMAL ORGANIZATION

Formal organization is needed for the purpose of:
• Assigning roles, responsibility and necessary authority to employees.
• For effective coordination and integration of work and other activities.
• Ensuring the maximum utilization or tangible and intangible resources.
• Ensuring free flow of communication within the organization.
• Reducing job and role conflict.

CLASS EXCERSISE
Having considered the role and importance of formal organization, in a class
interactive session, students are to examine the role of informal organizations in
an organization and list 3 of them.
1)___________________________________________________________________

2)___________________________________________________________________

3)___________________________________________________________________

7.4 ORGANIZATIONAL STRUCTURE

According to Peter Drucker, “Organization is not an end in itself, but a means

to an end of the business performance and business results”. He goes on to say
that, structure is a means for attaining the objectives and goals of an
organization. This statement implies that, the failure or success of a firm
amongst other reasons depends on its structure. We can therefore, define
organizational structure as:

68
Organizational structure is the framework within which an organization’s
activities, management process and functions, and all roles and
responsibilities of members of the organization are defined, divided,
structured and organized for effective coordination in order to achieve
predetermined goals and objectives of the organization.

Given the importance of organizational structures, certain questions must be

addressed by management about the kind of structure that will be the best in
attaining the goals and objectives of management. Cole (1996) identified five
key questions that need to be addressed. These are:

1. To what extent should we encourage specialization of roles?

2. What degree of discretion (empowerment) should be allowed to
individual job holders?
3. How much formality should be encouraged?
4. How many levels of authority should be established?
5. To what extent should decision making be centralized or decentralized?

7.5 FACTORS THAT DETERMINE ORGANIZATIONAL STRUCTURE

The following are factors that determine an organization’s structure:

1. Nature of the Business.

2. External environment

3. Technology

4. Size of the firm

5. Strategy

6. Goals/ Objectives

7. Culture

8. Statutory Regulations

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7.6 TYPES OF ORGANIZATIONAL STRUCTURES

1. FUNCTIONAL ORGANIZATION STRUCTURE

This is the structuring of an organization in line with major business functions

peculiar to the organization e.g. marketing, sales, finance, personnel etc.
According to Cole (1996), it is the best structure in a relatively stable
environment. The diagram below shows a typical functional structure of an
organization.
Managing
Director

Marketing Production Finance Personnel

Manager Manager Manager Manager

Sales Production Company Administrative

Executive Supervisor Accountant Executive

ADVANTAGES DISADVANTAGES
1. it provides better 1. Over specialization narrows
opportunities for promotion the viewpoint of key
and career development personnel

2. It encourages specialization 2. Conflict could easily arise

which increases due to sectional or
organizational efficiency departmental interests.

3. It is suitable for growth and 3. It could discourage

expansion strategy communication among
business functions or
departments.

70
2. PRODUCT BASED STRUCTURE

This relates to an organization structured along the lines of specific identifiable

products it manufactures. The product structure is typical of highly diversified
companies or firms that produce many products e.g. computer firms.

Managing Director

Hardware Software

Finance Sales Research & Sales

Development

ADVANTAGES
1. It encourages diversification of
products
2. It is relatively suitable for an
unstable environment
3. It encourages specialization which
increases organizational efficiency
DISADVANTAGES
1. Each manager may pay attention
only to his products to the
detriment of other products of the
company
2. It increases the problem of control
for top management
3. It also increases problems of
coordination

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3. MATRIX STRUCTURE
This is a combination of project based and functional structure. It is applied by
specialized firms such as construction and engineering and oil companies.

GENERAL MANAGER

Technical Manager Finance Manager Purchasing Manager

Manager Project A

Manager Project B

Manager Project C

KEY

Direct Responsibility & Authority

Joint Collaboration
ADVANTAGES DISADVANTAGES
1. It is best suited for organizations in 1. Allocation of resources could
many projects cause conflict

2. It avoids the duplication of 2. It could breed unhealthy internal

functional departments and competition and rivalry in the firm
managers for each project
3. It could create unnecessary
3. It aids the management functions administrative complexities.
of control, coordinating, planning
and forecasting

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4. GEOGRAPHICAL STRUCTURE

This structure befits an organization that operates in different geographical areas

which could be based on regions, country or continent.

MANAGING DIRECTOR

North Regional Eastern Regional Western Regional

Manager Manager Manager

Sales/ Marketing Personnel Dept. Accounts Dept.

Dept.

ADVANTAGES DISADVANTAGES
1. It lowers operating cost 1. It increases more control problems
for top management
2. It provides a good training ground
for managers 2. It requires more managerial staff
with training and skills and as such
3. It is relatively advisable for growth
could be expensive
and expansion strategy
3. It makes organizational
communication difficult.

73
CONCLUSION

The organizational structure of a firm is an enabler of overall economic

performance and most importantly a tool for enhancing the communication flow
in a firm and for reducing role conflict and ambiguity within a firm. However,
the forms discussed in this lecture are selected for basic discussion level. New
and contemporary forms of structure exist such as virtual, entrepreneurial,
divisional and much more.

SELF ASSESSMENT QUESTIONS (SAQs)

1. Briefly explain the following concepts:

i. Formal Organization
ii. Informal Organisation
iii. Organisation Structures
iv. Organisation Chart
2. Identify and discuss factors that determine organisation’s structure
3. Illustratively discuss the various types of organisation structure with their
advantages and disadvantages.
4. Is there any difference between the geographical based and product based
structures?

5. List both advantages and disadvantages of product based structures

MULTIPLE CHOICE QUESTIONS (MCQs)

1. The structure involving giving too much power to few managers in

running affairs of an enterprises is called………………………
(a) Autocratic structure (b) Oligopolistic structure (c) Centralized
structure (d) Centralisation
2. The allocation of tasks to groups of workers and stating their relationship
is known as………… (a) Organisation (b) Organisation structure (c)
Coordination (d) All of the above

74
3. A system in which every manager is allowed to use his initiative in
making and implementing vital decision
is…………………………………(a) Departmentation (b) Team
structure
(c) Decentralisation (d) Centralisation
4. In……………….structure, all members have common goal and are
collectively responsible for its achievement. (a) Team (b) Hybrid (c)
Line (d) Functional
5. The arrangement of positions / jobs in an enterprise in some coherent
manner to achieve corporate goals is called…………………………
(a) Organization (b) Organisational structure (c) A and B (d) None of the
above
6. The modern trend of organization structure is tending towards…………
(a) Staff (b) Divisional (c) Team (d) None of the above
7. One of the defects of organogram is that if
excludes………………………..
(a) Formal relationship (b) Informal relationship (c) Formal and
informal relationship
(d) All of the above
8. Joan Woodward found a correlation between the introduction of
improved technology and ………………… (a) The length of the line of
command (b) The span of control of the chief executive (c) A and B (d)
None of the above
9. One of the following is not a principle of organisation
(a) Centralisation (b) Divisional of labour (c) Individualism (d) None
of the above
10. A small business enterprise does not need organisational structure.
(a) True (b) False

75
 STUDY SESSION 8: CENTRALIZATION, DECENTRALIZATION &
SPECIALIZATION

LEARNING OBJECTIVES
At the end of this lecture the students after an interactive class session should be
able to:

✓ To understand the meaning of the concepts centralization,

decentralization and specialization.
✓ Appreciate the benefits of these concepts to different types of
organizations.
✓ Criticize constructively the assumptions underlying each concept
✓ Explore alternatives to the application of these concepts in a work
environment

8.1 INTRODUCTION
In the previous lecture, we introduced the concept of organization and
organizational structure. We examined the importance of structure to a firm and
the consequences of not having the appropriate structure to fit with the firm’s
strategy and resources. In this lecture we shall examine further three critical
issues that are imperative in the design of organizational structures and these
relate to the extent to which authority and decision making should be
centralized or decentralized in the firm and the degree of specialization that
should be permitted to exist in the firm through specialization.

8.2 CENTRALIZATION & DECENTRALIZATION

CENTRALIZATION
Centralization can be defined as the tendency for decision making authority to
be centralized at the top of the managerial hierarchy of an organization. The
degree of centralization in an organization is mainly determined by the
organizational structure of a firm.

76
According to Chandan (1987), pure form of centralization is not possible
except in small organizations. However, it is important to know that as an
organization grows in size and functions, there becomes an emergent need to
delegate authority, in other words, decentralize in order to optimize efficiency.

Centralization has its advantages and disadvantages. Let us consider a few of

them and then relate the discussion to three units of analysis, that is small, large
and virtual firms.
Advantages of Centralization
1. Uniformity of policies and decisions increases the chances of growth and
development since all policies and decisions are made at one central
point.
2. Centralization makes coordination and management control easy and
prompt.
3. Emergencies are better handled in centralized organizations, because at
such times quick decisions are taken at the top.
4. Centralization results in the optimal utilization of resources.
5. Centralization leads to improved decision making which may otherwise
be slower if the authority is diffused and consensus sought.
6. Centralization can be highly motivating and morale boosting for top
executives due to the fact that it provides prestige and power which
strengthens confidence, all of which are necessary ingredients for
decision making.

Disadvantages of Centralization
1. Centralization has been criticized for being undemocratic.
2. Centralization doesn’t encourage subordinates use of initiative and thus
hinder organizational creativity, innovation and inventiveness.

77
 3. Centralization may lead to discontent, anger and revolt within the
organization when capable people at lower levels of management are not
given the opportunity to take decisions.
4. Centralization doesn’t give individuals the corporate sense of belonging
and the we-feeling in the organization.
5. Top executives may be overloaded with work thus resulting in stress and
faulting decisions which can be described with the concept called—
satisficing.
6. Effective organizational controls may be difficult since responsibility for
any mistake is not easily assigned.

DECENTRALIZATION
Decentralization refers to the extent to which authority and responsibility is
been passed down to subordinates in an organization. The greater the degree of
delegation of authority and responsibility in an organization the more
decentralized it would be. Similarly, it is important to note that the degree of
decentralization is mainly determined by the organization structure and the
question that pertains to decentralization doubles as an important factor to be
considered when designing or choosing an organizational structure.

Just as pure form of centralization, though embellished with good advantages, is

not practical, so too Chandan (1987) is quick to mention that, pure form of
decentralization almost never exists. But it is important to state that, it becomes
expedient over time. We shall find out the reasons why? However, as is akin to
centralization, as an organization grows bigger through expansion, mergers and
acquisition, decentralization becomes necessary and practical. Decentralization
like centralization also has its advantages and disadvantages.

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Advantages of Decentralization
Before highlighting some relevant merits in decentralization, it is important to
be informed that that concept of delegated authority is an embodiment of
decentralization in practice. As such, the benefits of delegated authority also
align with those of decentralization as they are within the same context of
organization discourse. The following are advantages of decentralization.

1. It results in quick decision making.

2. Decentralization (Delegation) gives management more time and other
critical resources for strategic planning and policy making.
3. Decentralization (Delegation) increases organization wide motivation as
it contributes to the growth and development of employees across board
the organization and boosts their morale.
4. Decentralization (Delegation) enables organizations to meet and cope
faster with changing conditions that necessitate more flexibility.
5. Decentralization (Delegation) helps to prepare subordinates for higher
challenges and responsibility.
6. Decentralization (Delegation) is very much an enabling factor for
empowering employees and engendering organization commitment of
employees and organizational citizenship behaviour.

Disadvantages of Decentralization
1. It could engender conflict of interest among various departments or units
especially with regards to resource allocation and division of authority.
2. Decentralized structures may be expensive to maintain.
3. Decision making may not be consistent.
4. It may waste business resources such as time and finance.
5. Decentralized structures require greater coordination by senior
management to ensure that goal congruency is maintained.

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 6. Decentralization may encourage unhealthy internal competition which
may not be good for the organization.
8.3 SYNOPSIS
Whether centralization or decentralization will be the best form of decision
making process, authority and responsibility devolution in an organization is
usually a function of the nature, size and would or existing structure of a firm as
well as certain other contextual factors. Chandan (1987), alludes to certain
factors/variables that can be considered as being primary and hence, critical in
determining the need for a centralized or decentralized structure. These are:
1. Mission, goals and objectives of the firm.
2. Size and complexity of the firm.
3. Location of target market.
4. Competency of top level management.
5. Competency of subordinates
6. Desirability of creativity in the organization.
7. The time frame of decisions.
8. Adequacy of communication systems.
9. Types of tasks.
10.Existence of standing plans.
11.External factors.

8.4 SPECIALIZATION
Taking recourse back to the lessons in Economics received in the secondary
school, and with those who have paid keen attention to class lectures, familiarity
with the concept of specialization should be a problem. From our memories of
secondary school Economics the concept brings to the fore another concept it is
connected to—Division of labour propounded by one of the fathers of
Economics Adam Smith. Simply put, specialization (or Job Specialization) can
be defined as,

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 “The degree to which the overall tasks of an organization is
broken down and divided into smaller component parts” (Griffin,
2004).
As previously stated, job specialization evolved from the concept of division of
labour. The modern automobile manufacturing plant is a good example that
displays the concept and impact of specialization in a production line and in the
entire value chain of a firm. Griffin goes on to discuss four specific benefits of
specialization to organizations. Let us consider them briefly.

Benefits of Job Specialization

1. Job specialization increases workers’ proficiency at specific tasks.
2. Job specialization reduces transfer time between different tasks.
3. Job specialization defines more narrowly a job, and hence makes it easier
to develop specialized equipment to assist with that job.
4. Job specialization reduces the cost of training a new individual to take
charge of a particular work task in the absence of a previous employee
hitherto in charge.

Limitations of Job Specialization

While these advantages and many more exist to support the idea of job
specialization in the work environment, many more criticism of the managerial
approach have also emerged over time. Critical among these are:
1. Since job specialization encourages focus on a task, such task may
become monotonous and hence generate employee boredom and job
dissatisfaction.
2. The job may become too specialized and consequently offers no challenge
to excitement to individual.

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 3. Job specialization given its boredom and monotonous limitations could
contribute to increase absenteeism in a firm and consequently high
employee turnover.
4. Finally, over time job specialization could reduce the quality of work
output of the individual and consequently the quality of products.

CLASS EXERCISE CLASS EXERCISE

1 2

• SMALL Examine which of these firms will Examine these work design methods
FIRMS require more specialization, as alternatives to specialization:
centralization and decentralization and • Job Rotation
• LARGE discuss the reasons why! • Job Enlargement
FIRMS
• Job Enrichment
• VIRTUAL
FIRMS

CONCLUSION
Centralization, Decentralization and Specialization are all important in the
organizational setting. But their limitations call for a more ingenious approach
by management to militate against their negative impact on organizational goals
and process. Hence, while they may not all be possible or fully practical, it is
suggested that firms will better thrive in structures which have centralized
control with decentralized authority and which design jobs to either be more
rotated, enriched or enlarged from time to time.

SELF ASSESSMENT QUESTIONs

1. Differentiate between the under-listed terms

i. Formalisation & Specialisation
ii. Centralisation & Decentralisation

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 iii. Authority & Responsibility
2. What are the benefits of job specialization to a manufacturing company?
3. Write short notes on: (i) Job enlargement, (ii) Job enrichment, and (iii)
Job rotation
MULTIPLE CHOICE QUESTIONS

1. An organizational practice according to which decision making freedom

is available to lower level managers is classified as

a) decentralization
b) centralization
c) autonomy of effort
d) congruency

2. Minimum freedom for managers and maximum constraints are main

features of

a) total autonomy
b) total centralization
c) total decentralization
d) total congruency

3. Maximum freedom for managers and minimum constraints are main

features of

a) total autonomy
b) total centralization
c) total decentralization
d) total congruency

4. Degree to which freedom is given to lower level managers for decision

making is classified as

a) decentralization
b) centralization
c) autonomy
d) congruency

5. A process of retaining authority in the hands of a few high level managers

is called:

83
a) centralization.
b) decentralization.
c) formalization.
d) none of the above.

6. Which of the following is not an advantage of decentralization?

a) management develop their own decision-making skills.

b) managers can exercise more autonomy.
c) managers are more motivated.
d) none of the above.

7. Determining the number of people who are accountable to a single

manager refers to:

a) chain of command.
b) degree of centralization.
c) span of control.
d) degree of specialization.

8.One of the building blocks of organizational structure is?

a) authority
b) specialization
c) centralization
d) decentralization

9. The process of identifying specific jobs that will be done and who will
perform them is known as?
a) Job specialization
b) Job centralization
c) Job decentralization
d) Job departmentalization

10.Specialization is synonymous to the concept of _______?

a) Strategy
b) Planning
c) Division of labour
d) Diminishing returns

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 STUDY SESSION 9: BUSINESS COMMUNICATION
LEARNING OBJECTIVES: At the end of this lecture the students after an
interactive class session should be able to:

✓ Define business communication.

✓ Understand the various methods/types of communication used in the
business setting.
✓ Describe a simple process of communication with its critical elements.
✓ Understand the role of communication in a business setting.

9.1 INTRODUCTION
Communication is a very important process in an organization. It has been
described as the lifeblood of a business. The success or failure of an
organization has sometimes been tied to the degree of communication in such
firms. In this lecture we shall take a look the meaning of communication and
business communication, purpose and role of business communication, methods
of communication, elements in the communication process and barriers to
effective communication.

9.2 MEANING OF COMMUNICATION & BUSINESS COMMUNICATION

According Cole, (1996), “Communication is the process of creating,
transmitting and interpreting ideas, facts, opinions and feelings”. While,
DuBrin (2009) defines it as, “….the process of exchanging information by the
use of words, letters, symbols, or nonverbal behaviour”. Williams (2011)
defines it as, “the process of transmitting information from one person or place
to another”. One final definition is that of the American Management
Association. They define it as, ‘Communication is any behaviour that results in
an exchange of meaning’.

85
In taking time to peruse through a few good business communication texts, I
observed that no one author gave a single straight forward definition of business
communication. All definitions were given within the context of
communication. Well this supports the approach to defining compound terms
which is to break them down and define concept by concept so as to have a
personal grasp of holistic meaning of the subject matter. In this case we have:

BUSINESS COMMUNICATION

Two definitions of business would be referred to here. “Business is any activity

that seeks to provide goods and services to others while operating at a profit”
(Nickels et al., 2005), “Business is the organized effort of individuals to provide
and sell, for a profit, the goods and services that satisfy society’s needs” (Pride
et al., 2008). Now let us synthesize previously given definitions or any of the
definitions of communication and then arrive at a definition of communication
suggested by you.

According to you, Business communication is :

..................................................................................................................................
..................................................................................................................................
..................................................................................................................................

At the end of this lecture will be explored a few good contemporary definition
of business communication. But before that let us examine the purpose of
business communication and then proceed to explore the various methods/types
of business communications.

8.3 PURPOSE/ROLE OF BUSINESS COMMUNCATION

The business communication process is a very dynamic process. It imperative to
examine the role of communication in business, and consequently the purpose

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of business communication. Adapting the work of Cole and Kelly (2011), the
following are specific points on the role of communication in business. This
would be discussed in class in greater details and you would be expected to
develop these points.

1. Communication is central to
6. Development of organizational culture.
understanding organizational
7. Communication plays a major role in
behaviour
successful strategy formulation and
2. Communication is critical to the
execution, [and in addition policy
control function of management.
deployment].
3. Communication is a good tool for 8. With effective communication, firms
motivation. can easily achieve maximum
Performance management.
4. Effective communication helps to
9. Effective communication facilitates
promote job employee satisfaction.
decision making.

5. Communication is very key to 10. Effective communication is a key tool

information dissemination. for efficient management of change.

8.4 METHODS/TYPES OF BUSINESS COMMUNCATION

Methods of business communication are channels through which the message to
communicated is passed on to the audience for whom it is meant. Basically, the
norm is to discuss and emphasize on the two traditional methods of business
communication and communication in general namely:

1. Oral Communication - An oral communication can be formal or

informal. Generally business communication is a formal means of
communication, like: meetings, interviews, group discussion, speeches
etc. An example of informal business communication would be—the
Grapevine.

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 2. Written Communication - Written means of business communication
are usually formal in nature and they includes - agenda, reports, manuals,
memos, proposals, contracts etc.

A contemporary guide or text in business communication would definitely

deviate from this norm. Williams (2011), for example suggest four types of
communication (channels). They are listed and summarized below:

• Formal
• Informal
• Coaching/Counselling
• Non-verbal.

1. Formal communication channels are used to carry organizationally

approved messages and information. Messages that involve organizational
objectives, rules, policies, procedures, instructions, commands, and request for
information etc are all transmitted via this formal communication process.
Three formal communication channels that exist are: downward, upward and
horizontal.

2. Informal communication channels can also be referred to as the grapevine.

They are used to transmit messages from employee to employee outside the
formal communication network.

3. Coaching and counselling are two forms of one-on-one communication.

While coaching involves communicating with an individual for the purpose of
improving their job performance, counselling involves communicating with an
individual to help manage job related issues like stress, family-work life
balance, health issues, retirement planning etc.

88
4. Nonverbal communication is any form of communication that doesn’t
involve the use of words. Two types of nonverbal communication usually
discussed within the cycles of research are kinesics and paralanguage.

8.5 ELEMENTS OF THE COMMUNICATION PROCESS

The communication process comprises of various actions, activities and
operations which are critical to consolidating any attempt to communicate
irrespective of the audience or message involved. Now, there is no generally
acceptable standard in communication theory with respect to how many actions
or steps are involved to describe this process. However, let us stick to the model
below.

Sender Encoding Medium

(channel)

Source of Message

Message

Noise

Feedback Decoding

Figure 9.1 Elements of the Communication Process

• The first activity in a communication process is for a message to be

conceived by an individual, group, people, or an organization who is the
sender.
• Encoding is the stage or element that has to do with selecting the
appropriate symbols with which to send the message for it to be
understood by receiver.

89
 • The medium is the chosen path (channel) that the message passes
through. It could be verbal or nonverbal medium/channel.
• Decoding involves breaking down the codes with which the message was
sent to the receiver so as to understand the meaning of the message.
• Feedback occurs when the receiver of the message responds to the sender
thus acknowledging understanding of the message. Without feedback the
communication will be said to be one-way, but with feedback the
communication is two-way.
• (Noise is a possible barrier to effective communication between the
encoding and decoding stage. Thus it what is responsible for the message
to be distorted and not clearly understood between the sender and the
receiver).

9.5 BARRIERS TO EFFECTIVE COMMUNICATION

In between a communication process there would be some common problems
which could occur and pose as barriers to effective organizational
communication. These are:
• Noise barriers
• Semantic/Language barriers
• Feedback barriers
• Cultural barriers
• Sender credibility
• Communication skills

These barriers could be remedied through:

• Feedback
• Improved Vertical Communication
• Selection of appropriate channel
• Improving basic communication skill

90
 • Planning

9.6 ORGANIZATIONAL COMMUNICATION

In contemporary organizations irrespective of type of organizational structure,
there would usually be four categories or forms of formal communication flows.

• Vertical Communication
This refers to the downward and upward flow of communication within
an organization. Downward flow occurs when management
communicates policies, plans, information, queries, etc. to subordinates.
Upward flow of communication occurs when subordinates communicate
ideas, suggestions, comments, complaints, feedback etc.
• Horizontal communication
This refers to communication flow and/or exchange of information
between management and staff or officers of equal level in the firm. For
example exchange of information between head of production and head
of marketing/sales.
• Quasi Vertical or Semi-Vertical Flow
In organizations where intermediaries like trade unions exist, such unions
serve as channels of communication both upwardly and downwardly but
most importantly upwardly. This would always involve an arrangement
of tripartite nature i.e. management on one hand, workers on the other
and the union in between.
MANAGEMENT

TRADE UNIONS

STAFF/WORKERS

Figure 9.2 Quasi Vertical or Semi-Vertical Flow

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 • Diagonal Communication
This take place when a superior officer in one department communicates
directly with a subordinate in another department. This could easily lead
to friction between the superior and subordinate during downward
communication.

CONCLUSION
In all organizations good communication is the foundation for sound and
effective management and a very important element next used to corporate
performance. The structure of an organization beyond showing the chain
of command also shows the various communication lines within the
organization. As such communication is very important in reducing conflict
in an organization, enabling performance and ensuring goal congruency
within the firm.

SELF ASSESMENT QUESTIONS

1. Illustratively explain the communication process.
2. What are the roles of communication in contemporary businesses?
3. What does communication entails? Illustratively explain the elements of
communication process.
4. What are the roles of communication in contemporary businesses?
5. Identify and explain the methods of communication channels.
6. Discuss barriers to effective communication in most organisations.

Multiple Choice Questions

1 Generally speaking, in business we communicate to;
a) Entertain
b) Persuade
c) Persuade and inform
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 d) Inform
2 Effective communication is essentially a;
a) Two way communication process
b) Three way communication process
c) One way communication process
d) Both a one way and two way process
3 Which of the following options is an important issue in the definition of
communication?
a) Transmission and reception of messages
b) Involvement of people
c) Process of communication
d) All of the above
4 Role of communication facilitates managerial functions, change people’s
attitudes and enabling social behaviour
a) True b) False
5 Message is clearly conveyed and the sender receives the desire results in
interpersonal sensitivity
a) True b) False
6 Human communication is essentially;
a) Perfect b) Emotional c) Imperfect d) Short lived
7 Which of these is an electronic mode of communication?
a) Letter b) Typewriter c) Fax d) Circulars
8 Rearrange these steps in the process of interpersonal communication
A. Deciding B. Message C. Receiver D. Sender E. Encoding F. Feedback
G. Channel
a) ABCDEFG
b) GFEDCBA
c) DCBAEFG

93
d) DEBGACF
9 As a process of sharing thoughts and ideas, communication suffers
mainly from;
a) Physical barriers
b) Individual differences
c) Non-physical barriers
d) Both physical and non-physical barriers
10 Which of the following is an option to overcome communication
barriers?
a) The use of pictures
b) Practising emphatic communication
c) Setting communication goals
d) All of the above

94
 STUDY SESSION 10: LOCAL & MULTINATIONAL BUSINESSES;
PRIVATIZATION & NATIONALIZATION

LEARNING OBJECTIVES
✓ At the end of this lecture the students after an interactive class session
should be able to:
✓ Distinguish between a local, international and multinational business
✓ Clear differentiate between the concepts of privatization and
nationalization
✓ Appreciate the strategies with which local firms can become international

10.1 INTRODUCTION

The growing influence of globalization has led to the increase in the diffusion
and expansion of business interest across the globe. This is owing to the fact
that globalization in theory and practice is expected to encourage the free flow
of goods, capital, information and other business resources across various
geographical and trade boundaries of the world. The extent to which all
countries especially countries in the South (Developing Countries) are
beneficiaries of the development process is questionable. However,
globalization has an impact on both local and international businesses. In this
lecture we shall examine the definitions and characteristics of both types of
businesses and then attempt a brief overview of the nature and dynamics of
nationalization and privatization.

10.2 DEFINING LOCAL & MULTINATIONAL BUSINESSES

10.2.1. Local Businesses
A local or domestic business can be defined as one that is established in a
particular country, operates within the territorial and trade boundaries of the
country, sells its goods and/or services within that country and usually

95
maintains a market scope and production scale (small, medium or large) within
that country. Elsewhere, it has been defined as, “A company which provides
goods or services to a local population”. Though most often used when
referring to a locally-owned business, the term may also be used to describe a
franchise or corporate branch operating within a local area
(Businessdictionary.com).

From the definitions, the characteristics of local businesses can be easily

gleaned. Let us proceed to examine some of the benefits of local businesses.
• Local businesses have easier access to raising capital in all forms either
from creditors, stock exchange and personal financing.
• Local businesses understand the market terrain and hence are positioned
to gain market share easily than international or incoming foreign
business would.
• Local businesses can take easy advantage of economies of scope but this
may not be easily transferable to economies of scale where the nature of
such a business is very capital intensive.
• Local business do not have challenges associated with bureaucratic red
tape and ritualism because for the most part they are usually small and
medium in size and are characterized by flexible structures and in most
cases no formal organizational structure.

Irrespective of the benefits associated with local business they however do

encounter certain problems in the pursuit of their business mission, goals and
objectives. These include the following:
• Due to the fact that they are usually small and medium in size they are
mostly faced with the problems of undercapitalization and
underutilization of capacity.

96
 • The nature of small businesses makes them easily susceptible to poor
management across the functional business areas especially in the areas
if finance and personnel management.
• Their lack of proper organizational structure usually translates to their
inability to be well organized for consistent performance in turbulent
business environments and times.
• Small businesses are usually threatened by the lack of resources and
capabilities to compete with foreign business which seek to enter their
market terrain and domain.

CLASS EXERCISE
In an interactive class session students should identify 5 ways through which
local businesses can overcome or mitigate against these challenges.
1.

2.

3.
4.

5.

What should be the role of Government & other direct/normative stakeholders

in this regard?
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------
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----------------------------------------------------------------------------------------------

10.2.2. Multinational Businesses

Multinational businesses (or multinational corporations or enterprises as they
are otherwise called) on the other hand have been defined from several
viewpoints. Let us examine a few of these definitions to get deeper insight into
the workings and dynamic nature of multinational businesses.

• Multinational Corporations have their headquarters in one country but

operate in many countries”—Weihrich & Koontz (2005)

• “Multinational business is that which has a world-wide marketplace from

which it buys raw materials, borrows money, and manufactures its
products and to which it subsequently sells its products”—Griffin
(2004).

Multinationals are usually big corporations which were originally established in

a particular country (usually developed country) that serves as the home
country of the corporation. It spreads it business tentacles across different
countries in the world and these countries are known as host countries. While
many subsidiaries are established in multiple countries across different
continents, a chain of command which domiciles authority and the operational
control and management of such a company is still maintained by the
headquarters in the home country of the corporation. Examples of multinational

98
corporations (MNCs) are, SHELL, NESTLE, CADBURY, CITIGROUP,
GLAXO, TOYOTA, etc.

10.2.3 Strategies for Multinational Expansion

A firm wishing to pursue an expansion of its business from a local or
international status to a multinational scope would usually have a number of
strategies to pick from. These include:
▪ Import/Export
▪ Licensing/Franchising
▪ Outsourcing
▪ Foreign Portfolio Investment (FPI) [This can otherwise be referred to as
Foreign Indirect Investment]
▪ Strategic Alliances
▪ Joint Ventures
▪ Setting Up Subsidiaries
▪ Off-Shore Acquisitions
▪ Foreign Direct Investment (FDI)
The benefits of multinational expansion are not farfetched if the reader has
clearly understood the merits and problems that local businesses face. Let us
examine in brief some of these benefits. They include:

▪ MNCs are better positioned to create and capture economic opportunities

in different countries around the world.
▪ As a result of Multinational presence and experience, they can easily
raise money for their operations around the world.
▪ MNCs are in a better position to access global business resources &
organic business functions and appropriate the same.

99
 ▪ In theory, MNCs are expected to serve as agents of sustainable
development; human resource & intellectual capital development;
economic development & growth in host countries where they operate.

CLASS DISCUSSION
From the ten (10) Lectures series you have no doubt gained a lot of intellectual
mileage on the dynamics of the business environment in Nigeria. Now with the
present economic challenges and global environmental turbulence, attempt to
highlight objective what you would consider as some of the major
disadvantages of multinational businesses to a country like Nigeria.
1.

2.

3.

4.

5.

Would you take a position that supports the motion that the benefits of
multinational businesses to Nigeria far outweigh the disadvantages? If yes or
no defend no position.

100
10.3 THE CONCEPTS OF NATIONALIZATION & PRIVATIZATION
10.3.1. Nationalization
Nationalization is a strategic ethnocentric response adopted by the governments
of mostly developing countries to check and balance the excesses and
exploitation of multinational operations in their country. It can be defined as,
“Takeover of privately owned corporations, industries, and resources by a
government with or without compensation”. Common reasons for
nationalization include (1) prevention of unfair exploitation and large-scale
labour layoffs, (2) fair distribution of income from national resources, and (3) to
keep means of generating wealth in public control (Businessdictinary.com). The
opposite of nationalization is privatization.

It is not usually in all cases that only multinational firms are nationalized by
host country governments. In some cases, firms that are privately owned by
citizens of a particular country but badly managed can be taken over (i.e.
nationalized) by the government as was the case in Nigeria between 2010-2011
where about five banks which were publicly quoted by private managed by
some Nigerians were taken over by the Government’s financial regulatory
authority the Central bank to guaranty the investment of Nigerians in such
companies. When firms or industries become nationalized, they become
monopolies and advantages and disadvantages accompany their new status. Let
us examine these in a nutshell.

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Advantages of Nationalization
• Control of a firm or industry by government is able to checkmate
consumer exploitation.
• Nationalized firms enjoy favourable regulatory policies which stimulate
economic activities that benefit the entirety of the people.
• Nationalized firms can enjoy greater economies of scale and scope.
• It has been argued that nationalized firms will be more sensitive to
environmentally related issues that are critical in their operations such as
pollution, waste management etc.
• Finally it has also been argue that nationalized firms have the capacity to
reduce the gap between the rich and the poor as the case has been
showed in a country like Venezuela.

Disadvantages of Nationalization
• Most nationalized firms are usually not managed efficiently. Such gross
inefficiencies results from the fact they are usually protected from
competition and hence they become increasingly ‘X’ inefficient.
• Nationalized firms are prone to loads of moral crises. Previously
government managed firms like Nigeria Airways, Railways, NEPA and
the likes are examples of firms who have suffered from gross corruption
and administrative malpractices.
• Low employee and organizational productivity and output of nationalized
firms usually translate into multiplier effects that stifle economic growth
and development in the long run.
• Nationalization discourages private sector driven initiatives which are
the bedrock of creativity and innovation in the economy.
• Finally, nationalization discourages foreign direct or portfolio
investments which are critical for economic growth and development.

102
10.3.1. Privatization
Simply put, privatization is the opposite of nationalization. Primarily, it can be
defined as a process through which a previously owned and operated
government enterprise is sold and transferred to private organization for
management and to enhance operational efficiency. Privatization can also be
defined as the divestment of government’s interest in a particular company to
private management and control.

Examples of the most recent privatizations stories in Nigeria include,

NEPA/PHCN, PORTS, REFINERIES, FERTILIZER COMPANIES,
CEMEMT COMPANIES, STEEL ROLLING MILLS etc. Have they all been
success stories? You are expected to conduct an Internet research and find out.
The drive for privatization has been given a moral boost over the years with the
cliché; Government has no business being in business. Ever heard it?

While this cliché has generated heated debates across different levels and units
of analysis, the question is: Should all government businesses be privatized?
Secondly, who actually benefits from privatization, Government, the public or
the capitalist? These issues are not within the scope of our syllabus. Let us
quickly examine the benefits and demerits of privatization and then put it in
perspective.

Advantages
• Privatized companies tend to run more efficiently than nationalized
companies.
• Privatized companies are better able to enhance organizational
performance and contribute to GDP growth through effective
coordination of the firms with appropriate management objectives and
global best practices.
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 • The incidence of corruption is reduced to the barest minimum when
government run companies are privatized.
• Privatized companies have easier access to raising capital and attracting
external funding.
• Privatized companies are engines of creative and innovation in a
developing and developed economy.

Disadvantages
• Most privatized companies tend to abuse the lack of government
intervention and such excesses translate in exploitation of labourers and
the entire public through indiscriminate pricing and sharp practices to
maximize shareholders value and returns.
• Where it is a single firm that has been privatized and not an entire sector
or industry, the likelihood of monopoly will still prevail.
• Premature privatization may have consequences with negative multiplier
effects on a country’s economy in terms of improving economic welfare of
its citizens. PHCN is a case in question.
• Privatization does not fully ensure the redistribution of wealth in an
economy.
• Privatization could reduce the social benefits from certain sectors
previously enjoyed pursuant to pareto-optimal policy deployments.

CONCLUSION
In this lecture we have examined the nature and dynamics of local businesses
and multinational businesses. We have also looked at the concepts of
privatization and nationalization. While it is important to note that in a changing
environment the application of these concepts produce certain benefits, it is very
important to pay attention to their demerits so as to have a balance in policies

104
that will continue to ensure that all citizens and economic stakeholders in a
country are not left out in outcomes of economic growth and development and
its most important indicator welfare for and of all.

Multiple Choice Questions

1. Which of the following statements is true about Privatization through
Joint Venture?

(a) Selling part of government company’s assets to private citizens

(b) Selling part of government company’s assets to foreign individuals
(c) Selling part of government company’s assets to government officials
(d) None of the above
(e) All of the above
2. Commercialization means . . . .

(a) Privatization of a government company

(b) Changing a manufacturing company to a trading company
(c) Restructuring an enterprise (d) All of the above (e) None of the above
3. A commercialized firm is expected to be . . . .

(a) Profit-making (b) Bankrupt (c) Privatized (d) All of the above (e) None of
the above
4. Which of the following elements is a barrier to globalization?
(a) Foreign Direct Investment (b) Trade liberalization (c) Trade regulation
(d) All of the above

(e) None of the above

5. What is the difference between multinational organizations and

transnational organizations?

(a) The difference is a myth

(b) Multinational organizations are international while transnational
organizations are not really international
(c) Multinational organizations have headquarters in one country but operate
in many countries while Transnational organizations view the world as
one market
(d) Transnational organizations have headquarters in one country but operate
in many countries while Multinational organizations view the world as
one market
(e) None of the above

105
 6. Which of the following statements is not true about Liberalization?

(a) Liberalization promotes the use of market forces in coordinating

economic activities
(b) Liberalization involves deregulation
(c) Liberalization involves nationalization (d) All of the above (e) None of
the above
7. Which of the following is not a privatization method?

(a) Divestiture (b) Initial Public Offering (c) Auction (d) All of the above (e)
None of the above
8. We are said to be moving from the industrial age into the
(a) post-industrial age (b) age of enlightenment (c) information age (d) neo
agricultural age (e) none of the above
9. Which of the following statements is true about Privatization through Joint
Venture?

a) Selling part of government company’s assets to private citizens

b) Selling part of government company’s assets to foreign individuals
c) Selling part of government company’s assets to government officials
d) None of the above
e) All of the above
10. Which of the following is not associated with liquidation?

(a) Economic viability (b) Shut down of a company (c) Selling of all
company’s assets (d) Redundancy
(e)None of the above

106
Solutions to Multiple Choice Questions

MCQs Study Study Study Study Study Study Study Study Study Study
Session Session Session Session Session Session Session Session Session Session
1 2 3 4 5 6 7 8 9 10
1 D E A C D D D A C A
2 C B D B D E A B A E
3 C B B B B B C C D A
4 A D D C B E A C A C
5 A D C A D D B A A A
6 B A D A A B C D B D
7 B B A A D B B C C C
8 B B A B A D C B C C
9 C C B B C B C A D C
10 B C B C C B B C D A

107
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