EDS 111

CHALLENGES AND CAUSES OF FAIL-

URE IN ENTREPRENEURIAL BUSI-
NESSES
Learning Objectives
 At the end of this lecture, students are ex-
pected to;
 (i) Determine the different type of constraints
facing entrepreneurs
 (ii) Classify such constraints
 (ii) Determine the reasons for such con-
straints
 (iii) Explain the effect of such constraints on
business
 INTRODUCTION
 In developing economies of which Nigeria is
one of them, the industrial sector’s contribu-
tion to GNP of the economy is about 20% and
60% of this comes from entrepreneurship in
form of small and medium scale enterprises.
Cont’
 To ensure suitable growth in this sub-sector
of the economy, government agencies and fi-
nancial institutions play substantial role in fi-
nancing and promoting such businesses.
 In spite of this, the development of en-
trepreneurship has been retarded by a num-
ber of factors and constraints.
CONSTRAINTS OF ENTREPRENEUSHIP

 The constraints facing entrepreneurial busi-

nesses in Nigeria in particular and developing
countries in general are highlighted below:
 (i) Finance
 Inability to obtain the required funds
 High cost of initial capital
 Weakness in Financial planning and man-
agement
 (ii) Management Incompetence
Cont’
 (iii) Infrastructural constraint
 (iv) Inadequate and incompetent manpower
 (v) Political instability
 (vi) Sociological and latitudinal influences
 (vii) Stringent government policies
Cont’
 (viii) Poor implementation of government
policies
 (ix) Competition from foreign businesses
 (x) Poor manpower training and development
 (xi) Personal problems
Financial Constraint
 Finance has always been regarded as a ma-
jor problem affecting the development of en-
trepreneurship.
 Finance is required by entrepreneurs both for
the establishment and expansion of the busi-
ness.
 Without sufficient funds, business operations
will be difficult if not completely impossible.
Cont’
 The problem of finance could be as a result of
(i) High cost of initial capital,
 (ii) Inability to obtain the required funds, and
(iii) Weakness in financial planning and
management.
Cont’
 (i) High cost of initial capital: Entrepreneur-
ship involves a high initial capital outlay.
 Fund is needed at the inception for the acqui-
sition of both capital and revenue expendi-
tures such as plant and machinery, equip-
ment, stocks, among others.
Cont’
 (ii) Inability to obtain the required funds:
 Entrepreneurs always face the problem of
securing funds for the running of their busi-
nesses.
 This is usually caused by their inability to
meet up with the requirements off lenders in
terms of interest rates and collateral securi-
ties.
Cont’
 In most cases, financial institutions are not
willing to give financial assistance to small-
scale enterprises due to high mortality rate
associated with small businesses and the in-
ability of their entrepreneurs to produce viable
business plans, collateral security and guar-
antors for the business as required by banks
Cont’
 Although small business is synonymous with
entrepreneurship, in most cases en-
trepreneurs due to certain constraints usually
start small.
Cont’
 (iii) Weakness in financial planning and
management
 Entrepreneurs often have little or no time for
financial planning and management.
 They often consider such time as wasted on
less urgent details.
Cont’
 The importance of financial analysis is not
known to them and as a result, they are likely
to encounter difficulties in forecasting produc-
tion and inventory levels, credit and sales
volumes and so on.
 Most entrepreneurs concentrate more on
sales and production than on marketing and
planning for the future.
MANAGEMENT INCOMPETENCE

 Incompetent management is another serious

problem facing entrepreneurs.
 Most entrepreneurs feel they know it all and
therefore do not require any managerial ad-
vice.
Cont’
 They assume that they alone are qualified to
handle all the management functions, even if
they are totally incompetent in certain aspects
of management.
 This problem usually leads to other problems
such as sales inadequacy, inventory difficul-
ties and failure to create customers and to
keep abreast of competition.
INFRASTRUCTURAL CONSTRAINT

 Infrastructures include facilities needed for

the operation of business, such as housing,
power supply, water supply, distributive and
technological facilities.
 Inadequate infrastructure increases both the
initial and operating cost of a business.
Cont’
 For effective management of small and
medium scale enterprises, an entrepreneur
must at least have a little knowledge of how
to use modern methods and scientific tech-
niques in solving business problems.
POLITICAL INSTABILITY
 Political imbalance and uncertainty have a
negative effect on the business environment
and can discourage many from going into
business.
 Business dealings, especially during the polit-
ical era, are so connected with political affilia-
tion that an entrepreneur who is not a
staunch supporter of the ruling party is un-
likely to get on well.
SOCIOLOGICAL AND LATITU-
DINAL INFLUENCES
 This problem results from the unorthodox
ways in which many businesses are being
carried out, coupled with the general unethi-
cal practices of businessmen, these can hin-
der entrepreneurship.
Cont’
 For instance, little or no attention is given to
product quality and design and, as a result,
many prefer imported products not minding
their prices and quality.
Cont’
 Social vices such as constant union strike,
students’ unrest, tribal clashes, fuel scarcity,
constant traffic jam, ethnic clashes, religious
differences, human right infringement etc,
also adversely affect the development of en-
trepreneurship
STRIGENT GOVERNMENT POLICIES

 At various times, the government has intro-

duced stringent policies and measures that
could adversely affect the performance of en-
trepreneurs whose implementation became a
problem. The problem with most policies is
implementation.
POOR IMPLEMENTATION OF
GOVERNMENT POLICIES
 Most often, many incentives and loan
schemes designed by government to facilitate
the establishment and operation of en-
trepreneurship ended up not fulfilling the main
objectives due to wrong implementation.
Cont’
 The implementation problem normally results
from either assigning the responsibility to
wrong officers or from granting the loans to
the wrong entrepreneurs who will end up uti-
lizing the loan or channeling the loan to the
appropriate transaction for which it was col-
lected.
COMPETITION FROM FOREIGN
BUSINESSES
 The indigenous entrepreneurs face serious
competition from some expatriate companies
having more advanced technology, better or-
ganizational structure, managerial efficiency,
efficient marketing, effective distribution facili-
ties, financial capabilities etc.
 The competition is so stiff that in most cases,
indigenous entrepreneurs end up quitting the
business out of frustration.
POOR MANPOWER TRANING
AND DEVELOPMENT
 Managerial inefficiency mainly leads to poor
manpower training and development.
 Most entrepreneurs do not see any need on
spending money on manpower training and
development.
Cont’
 They consider it a waste of resources recruit-
ing well-trained and experienced personnel
for the management of their enterprises, but
rather prefer employing their close relations
on whom they will not spend much in main-
taining.
Cont’
 Also, high labor turnover is very rampant in
the indigenous enterprises due to lack of
good relationship entrepreneurs and their
workforce. This often has adverse effect on
the operations of the indigenous enterprises.
ENTREPRENEURS’ PERSONAL
PROBLEMS
 Most indigenous entrepreneurs engage in
sole trade businesses that may have started
from their parents’ occupation which do not
go beyond farming, trading, craftsmanship,
local manufacturing, and so on.
 These businesses do not grow or expand be-
yond their traditional scopes.
Cont’
 Other personal problems include marrying
many wives and having many children and
catering for members of the extended fami-
lies.
Cont’
 Inferiority and superiority complexes often af-
fect the progress of entrepreneurs as well,
just as emotional instability, resulting from
immaturity and lack of experience on the part
of the entrepreneur can negatively affect his
business.
OTHER FACTORS
Apart from all the constrained mentioned
above, there are other factors that could be
responsible for the failure and closure of en-
trepreneurial businesses such as:
 Poor planning
 Ineffective marketing
 Outdated technology
Cont’
 Bad product design
 Substandard products and
 Other inherent business problems like those
mentioned earlier
PREVENTIVE MEASURES
1. Entrepreneurs should take advantage of the
various programmes and institutions estab-
lished by the federal government to provide
the needed capital for the financing of their
businesses.
Cont’
1. Examples of such programmes and institu-
tions are the National Directorate of Em-
ployment (NDE), the National Poverty Eradi-
cation Programme (NAPEP), and most re-
cently the establishment of micro-finance
banks to provide capital mainly for en-
trepreneurs.
Cont’
2. Management should endeavour to seek the
necessary skills and training that will en-
hance their competence on the job.
Cont’
3. The manpower needed for the success of
the entrepreneurial business should be
properly trained and developed.
4. The employees should be allowed to attend
workshops and take courses that would en-
hance their productivity and creativity.
Cont’
5. Entrepreneurs should be devoted to their
ideas and must not allow their personal prob-
lems interfere with their businesses.
Conclusion
 Apart form the above mentioned constraints
facing entrepreneurship, there are so many
other constraints that entrepreneurs face in
the process of carrying out their businesses
especially in Nigeria.
 A prior knowledge of these constraints before
starting the business will go a long a way to
help the entrepreneur in knowing what to do
when he actually encounters such constraint
in the his or her business.
 Note that because business is a sub-system
in the overall business environment, it cannot
be devoid of these constraints.
Cont’
 Rather than trying to run away from these
challenges a thorough understanding of what
to do to solve such problems will help an en-
trepreneur to be equipped with skills and
techniques for dealing with these challenges.
 Challenges in most cases help entrepreneurs
to be better off.
 So they are blessing in disguise.
THANK YOU