THE IMPACT OF THE BUSINESS ENVIRONMENT ON THE PERFORMANCE OF NIGERIAN MANUFACTURING FIRMS

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CHAPTER ONE/INTRODUCTION

1.1       BACKGROUND OF THE STUDY

In his theory of evolution, Charles Darwin sought to explain the nature of the relationship that exists between organisms and their environment. The theory “suggested that environmental change forces each species to incremental, but continuous, mutation or transformation. Through such a change, a living entity can adapt to its environment and survive. A specie that cannot conform to its environmental requirements is doomed, eventually becoming extinct” (Wright et al, 1996:7). This theory emphasizes that animals evolve as time goes on and that the direction of this evolution depends on the nature of the environment in which the animal lives. When life was purely aquatic, animals evolved features that enabled them to live in water; when life moved from water to land, the amphibians that effected the transition evolved features that enabled them to survive in both land and water, and when life became terrestrial, terrestrial animals developed features suited for life on land.  Darwin’s theory also postulates that the ability of any given specie to survive in its environment for long will depend on the ability of such specie to adapt to changes in its environment.

On closer examination, the theory of evolution itself seems to be an exposition of a primordial universal law that manifests with an uncanny similarity in biology and in the corporate world. For instance, in management literature, coevolving refers to the corporate strategic process by which business organisations “routinely change the web of collaborative links among businesses to exploit fresh opportunities for synergies and drop deteriorating ones .” The links could be in the form of exchange of information, shared business assets and strategies, etc. Only organisations that master this process are able to synergize.  But the term co-evolution is an aspect of the general theory of evolution and therefore has its origin in biology and “it refers to successive changes among two or more ecologically independent but unique species such that their evolutionary trajectories become intertwined over time; as these species adapt to their environment, they also adapt to one another. The result is an ecosystem of partially interdependent species that adapt together……(Eisenhardt and Galunic, 2001: 111-138 ).

Management and organizational theorists have been significantly influenced by this perspective of evolution;

As a result they believe that organisations are influenced by the environment; that environmental change is gradual, requiring concomitant organisational change; and that effective organisations are those that conform most closely to environmental requirements. Firms that cannot or do not adapt to gradual external change eventually find themselves outpaced by their competitors and forced out of business. 

Organisations are systems.  The Oxford English Dictionary defines a system as a set or assemblage of things connected, or interdependent, so as to form a complex unity; a whole composed of parts in orderly arrangement according to some scheme or plan. Systems can be considered to be either closed or open. A system is regarded as open if it exchanges information, energy or material with its environment as happens with biological or social systems; otherwise it is regarded as closed (Koontz et al, 1981:19). Researchers have long discovered that organisations are open systems that constantly interact with their environment and in the process affect and are affected by the environment. According to Hicks and Gullet (1987:70), an organisation does not exist in a vacuum but exists in an environment that provides resources and limitations. If it is to remain prosperous, an organisation must continually adapt to its environment which is constantly changing. They also believe that failure to adequately adapt to the environment is a major cause of organisational failure. 

The environment in which organisations operate in Nigeria as in other parts of the world is dynamic and is becoming increasingly so. As the environment changes, there is the need for organisations to change in order to adapt to such environmental changes. Organisations that are unable to adapt eventually die or fold up. The increase in the rate of change, complexity as well as level of competition in the Nigerian business environment can be attributed to a number of factors. First among such factors is globalization. Propelled by accumulated developments in transportation and information technology, globalisation has transformed the economies of the world into one global market where local market boundaries to a large extent have been effaced. This simply implies that a firm in Nigeria is not just competing with other firms in its industry in Nigeria but with every other firm in the same line of business anywhere in the world. Globalisation therefore spells intense competition and for firms in developing countries like Nigeria, this poses a big threat. Of course, it also increases the range of opportunities open to each individual firm.  This calls for some level of flexibility among firms if they are to remain competitive.

Commenting on the importance of organisational flexibility, Blyton (1998:57) states that greater market uncertainty and changes in technology and production processes are widely associated with giving added significance to organisational flexibility and that other factors include growth in international trade and competition stemming from the increased activities of Japan and other industrialised nations, expansion of multi-national corporations, increase in cross border trade due to liberalisation and the collapse of the east-west divide in Germany. Blyton believes that this growth in competition and expansion of multinationals into a wider range of markets have made the markets more volatile and less dependable for individual companies and that this has in turn heightened the need for organisations to increase their responsiveness and consequently to develop greater flexibility.

Another factor that has increased the level of turbulence in the Nigerian business environment is the extensive and comprehensive economic reform programme which the federal government has for some time been implementing. This reform initiative involves among other things the privatisation and commercialisation of government owned companies (NEEDS, 2004). This has introduced competition into economic sectors that hitherto were monopolies and has also expanded the scope of business opportunities available to operators in the private sector. There is also the recapitalisation requirement for the banking and insurance sub-sectors which has led to the consolidation of that sector through mergers and acquisitions. Globalisation and the economic reform programme by the government together comprise what Kazmi (2005: 108) refers to as the LPG (liberalisation, privatisation and globalisation) of the business environment. Combine this with the constant changes occurring in all the other aspects of the business environment especially government policies and it becomes clear that any organisation that remains unresponsive is doomed to failure.

Organisational performance is a multi-dimensional concept that generally indicates how well an organisation is managed and also the quality of corporate governance of such organisations. There are so many measures of organisational performance. Some of them are quantitative while the others are qualitative. Quantitative measures of organisational performance exist for the determination of specific aspects of organisational performance mainly in the areas of profitability, liquidity, activity and efficiency. Profitability measures tend to be the most popular to researchers in the area of organisational management and this may be due to the fact that profitability is often the grand objective of business organisations and also, profitability somewhat sums up the other measures of performance. However, the Central Bank of Nigeria, the Manufacturers Association of Nigeria and most researchers also use capacity utilization in  measuring the performance of the manufacturing sector (CBN, 2004: MAN, 2008: Aluko et al, 2004).

Nigeria is ranked as one of the poorest nations in the world where the citizens survive on about one dollar per day. There is a very strong correlation between unemployment and poverty and consequently if the level of employment in the country improves significantly, poverty level will drop and the standard of living of the citizens will improve. The manufacturing sector of Nigeria by virtue of its sheer size and the nature of its operations is in a very good position to significantly reduce the level of unemployment in the country and consequently the problem of poverty and crime. If Nigeria is to make progress towards achieving the millennium development goals (MDGs), in particular, the target to halt poverty by 2015, it needs renewed industrialization (BOI, 2004).

The manufacturing sector is noted as one of the engine of growth, an antidote for (un)employment, a creator of wealth and the threshold for sustainable development but it seems to be facing more challenges than any other sector in our economy. The inability of the sector to cope with the challenges is reflected in its dismal performance over the years. All the indices of performance for the sector are negative.

Capacity utilization, for instance, which is a very good measure of performance for the sector, has been alarmingly low over the years. As at 1977, capacity utilization in the sector stood at 78.8 percent; but by 1996, it was down to an all time low of about 29.3 percent and as at 2004, it was 45 percent (CBN, 2004:292-296). Although this indicates a significant change from the 1996 figure, it is still far below expectation. It has been observed that one of the greatest problems facing the Nigerian economy is that of low capacity utilization in the manufacturing sector and this problem became more pronounced and aggravated by the structural adjustment programme and more recently by globalisation and all that accompanied it (Aluko et al, 2004: 120). 

The Nigerian manufacturing sector has not been able to contribute significantly to the economic development of the country as indicated by its contribution to the nation’s GDP. In 2007, its contribution to GDP was a paltry 7.4 percent (MAN, 2008:35). There is a school of thought that argues that a strong manufacturing base is not all that important to the health of an economy and that strong modern economies do not seem to require a dominant manufacturing sector (Nahmias, 2001:5-6). World Bank (2005) statistics on the output profile of  the group of seven industrialized (G7) countries seem to support this line of argument because it indicates that for these countries, the service sector contributes an average of 65 per cent of the gross domestic product (GDP) while the manufacturing sector contributes an average of about 19 percent (see appendix). However, even going by these figures, it is obvious that the Nigerian manufacturing sector is not contributing as much as it should to the economy because there is a wide gap between what the sector is currently contributing and the average contribution for the G7 countries.

The high rate of mortality in the sector clearly highlights the inability of the sector to cope with its challenges. According to Jide (2006), over 750 firms in the sector have closed down in the recent past (in 2000, MAN was made up of about 2000 member companies) and many more face the prospect of imminent collapse in the near future.  As at 2006, a survey by MAN shows that 30 per cent of the industries were classified as closed down, 60 per cent were classified as ailing while only 10 per cent of the firms in the sector were classified as operating at sustainable level (MAN, 2006:49).

Over the years, the problem highlighted by the Manufacturers Association of Nigeria (2008:36, 2006:49) as being responsible for the poor performance of the sector had been basically the same and they include;

  1. Poor and deteriorating infrastructure services particularly in the area of power supply.
  2. Inadequate/inaccessibility to long term funds/high cost of funds.
  3. Influx of cheap/sub-standard/prohibited products particularly from the Asian market with its attendant weak demand of locally made products.
  4. Lack of patronage of locally manufactured products by government at all levels.
  5. Inconsistent government policies
  6. Insecurity to lives and properties
  7. Scarcity/incessant increase in the price of petroleum products
  8. Poor administration/management of the ports
  9. Multiple taxes/levies from the three tiers of government.
  10. Unfavourable sub-region bilateral and multi-lateral trade policies such as the ECOWAS common external tariff (CET), the ongoing economic partnership agreement (EPA) between European Union and African Caribbean and the (ACP) Pacific countries.
  11. Corruption and all forms of trade malpractices including smuggling, dumping, under-invoicing, counterfeiting of products, etc.
  12. Difficulty of accessing raw materials which is more evident for companies in plastic sector.   

Clearly, all the factors listed above are aspects of the external environment and consequently, manufacturers blame the poor performance of the sector and the high rate of mortality on a hostile operating environment.  The few empirical studies in the sector had gone along with the manufacturers and had blamed the business environment for the poor performance of the sector.

The perception of the federal government of Nigeria with regards to the problems of the manufacturing sector is consistent with those highlighted above by the Manufacturers Association of Nigeria. In a document titled “Obasanjo’s Economic Direction 1999-2003”, the FGN (2000) identified the following as the problems facing the Nigerian manufacturing sector;

  1. Low capacity utilization which averaged 30% in the last decade;
  2. Low and declining contribution to national output which averaged 6%;
  3. Declining and negative real growths;
  4. Dominance of light assembly type consumer goods manufacture;
  5. Low value-added production due to high import dependence for inputs;
  6. Prevalence of unviable state owned enterprises;
  7. Accumulation of large inventories of unsold finished products, and
  8. Dominance of sub-standard goods, which cannot compete internationally.
  9. In the same document it was observed that the principal factors that contributed to the deplorable state of the manufacturing sector was largely due lack of an enabling environment which had manifested in the form of
  10. Policy and polity instability;
  11. Poor macro-economic environment;
  12. Bureaucratic bottlenecks;
  13. Poor legal environment which could not guarantee property right and safety;
  14. Lack of good governance;
  15. Corruption; and
  16. Low commitment of past governments to industrial development.

To blame the environment solely for the woes of the manufacturing sector may not be right. There is the need to also consider the quality of corporate governance in the sector because with adroit management, an organisation can at least make the worst of a bad situation and even if the business environment improves, global competition has come to stay. In era of global competition, survival and success will to a large extent depend on the quality of corporate governance. Most of the problems in the sector can be traced to low capacity utilization but the installed capacity of a manufacturing plant is determined not by the government or an executive fiat but is decided by top management. Ideally, such a decision should be based more on long term considerations (forecasting) of all relevant environmental factors that are likely to impact on the firm particularly local and foreign competition and the state of the economy. It is arguable that inadequate long term forecasting has led to an overly optimistic and unrealistic demand projections on which the installed capacity of most firms in the sector were based which has also contributed to the low level of capacity utilization being experienced in the sector.

 It is a fact that the hostile environment, in which manufacturers operate, particularly the infrastructural environment, has to a large extent negatively affected their performance. The big question however is “given the nature of their operating environment, are the firms in the sector doing what is necessary so as to achieve the best they can?” the business environment will ever remain a source of challenges to business organisations and the whole essence of strategic management is to constantly align organisations to their ever changing external environment so that they can best capitalise on opportunities and defend themselves against threats.