EDS 111

CHALLENGES AND CAUSES OF

FAILURE IN ENTREPRENEURIAL
BUSINESSES
Learning Objectives
 At the end of this lecture, students are
expected to;
 (i) Determine the different type of constraints
facing entrepreneurs
 (ii) Classify such constraints
 (ii) Determine the reasons for such
constraints
 (iii) Explain the effect of such constraints on
business
 INTRODUCTION
 In developing economies of which Nigeria is
one of them, the industrial sector’s
contribution 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
financial institutions play substantial role in
financing and promoting such businesses.
 In spite of this, the development of
entrepreneurship has been retarded by a
number of factors and constraints.
CONSTRAINTS OF ENTREPRENEUSHIP

 The constraints facing entrepreneurial

businesses 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
management
 (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
major problem affecting the development of
entrepreneurship.
 Finance is required by entrepreneurs both for
the establishment and expansion of the
business.
 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:
Entrepreneurship involves a high initial capital
outlay.
 Fund is needed at the inception for the
acquisition of both capital and revenue
expenditures such as plant and machinery,
equipment, stocks, among others.
Cont’
 (ii) Inability to obtain the required funds:
 Entrepreneurs always face the problem of
securing funds for the running of their
businesses.
 This is usually caused by their inability to
meet up with the requirements off lenders in
terms of interest rates and collateral
securities.
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
inability of their entrepreneurs to produce
viable business plans, collateral security and
guarantors for the business as required by
banks
Cont’
 Although small business is synonymous with
entrepreneurship, in most cases
entrepreneurs 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
production 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
advice.
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
difficulties 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
techniques 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
political era, are so connected with political
affiliation that an entrepreneur who is not a
staunch supporter of the ruling party is
unlikely to get on well.
SOCIOLOGICAL AND
LATITUDINAL INFLUENCES
 This problem results from the unorthodox
ways in which many businesses are being
carried out, coupled with the general
unethical practices of businessmen, these
can hinder 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
entrepreneurship
STRIGENT GOVERNMENT POLICIES

 At various times, the government has

introduced stringent policies and measures
that could adversely affect the performance of
entrepreneurs 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
entrepreneurship 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
utilizing the loan or channeling the loan to the
appropriate transaction for which it was
collected.
COMPETITION FROM FOREIGN
BUSINESSES
 The indigenous entrepreneurs face serious
competition from some expatriate companies
having more advanced technology, better
organizational structure, managerial
efficiency, efficient marketing, effective
distribution facilities, 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
recruiting 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 maintaining.
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
beyond their traditional scopes.
Cont’
 Other personal problems include marrying
many wives and having many children and
catering for members of the extended
families.
Cont’
 Inferiority and superiority complexes often
affect 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
entrepreneurial 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
established by the federal government to
provide the needed capital for the financing
of their businesses.
Cont’
1. Examples of such programmes and
institutions are the National Directorate of
Employment (NDE), the National Poverty
Eradication Programme (NAPEP), and most
recently the establishment of micro-finance
banks to provide capital mainly for
entrepreneurs.
Cont’
2. Management should endeavour to seek the
necessary skills and training that will
enhance 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
enhance their productivity and creativity.
Cont’
5. Entrepreneurs should be devoted to their
ideas and must not allow their personal
problems 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
entrepreneur 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