INNOSON
KIARA ACADEMY NNEWI
ENTREPRENEURSHIP DEVELOPMENT
By
NWADUHU, GODWIN OBINNA
ND(Ind. Elec), B.sc(Mgt), M.sc(Mgt), PGDE
February, 2017
1
Course Contents
ENTREPRENEURSHIP
1.2
What’s Entrepreneurship
1.3
Who’s an Entrepreneur
7
1,4
History of Entrepreneurship
8
1.5
Objective of Entrepreneurship
9
1.6
Features and Traits of Entrepreneurship
9
1.5
Characteristics of an Entrepreneur
10
1.6
Problems Militating against Entrepreneurship Development in Nigeria
10
2.1
DEVELOPING A BUSINESS IDEA
15
7
THE CONCEPT OF SMALL SCALE ENTERPRISES.
3.1
What is small scale Business?
16
3.2
Features of small scale Enterprises in Nigeria
17
4.1
Problems of small scale Enterprises in Nigeria
19
4.2
Solutions to some identified problems
21
4.3
Advantages of small scale Enterprises.
22
4.4
Disadvantages of Small Scale Enterprises.
22
WAYS YOU CAN OWN A BUSINESS IN NIGERIA
5.2.
Buying an existing business
24
5.3
Advantages of Acquiring an Existing business
24
5.4
Disadvantages of Acquiring an Existing business
25
2
5.5
Starting a new Business
25
5.6
Advantages of Starting a new Business
26
5.7
Disadvantages of Starting a new Business
26
5.8
Franchise
26
5.9
Investing in a Franchise business
26
5.10
Control of the Franchise
27
BUSINESS PLANNING AND DEVELOPMENT
6.2
Business Planning defined
28
6.3
Importance of Planning
28
6.4
Characteristics of a good Plan
29
6.5
Types of Planning
30
6.6
Other types of Planning
30
6.7
Steps in Planning Process
31
6.8
Management Defined
32
6.9
Functions of Management
32
BUSINESS OWNERSHIP
7.2
Sole Proprietorship
34
7.3
Advantages of Sole Proprietorship
34
7.4
Disadvantages of Sole Proprietorship
35
7.5
Partnership
35
3
7.6
Advantages of Partnership
37
7.7
Disadvantages of Partnership
7.8
Formation of Company
38
7.9
Article of Association
38
7.10
Memorandum of Association
38
7.11
Advantages of LLCs
37
39
7.12 Disadvantages of LLCs
40
7.13 Cooperative Society
41
7,14 Types of Cooperative Society
41
MOTIVATIONAL PATTERN OF AN ENTREPRENEUR
8.1 Motivation Defined
43
8.1
43
Importance of Motivation in Small Scale Business
8.2
Abraham Maslow’s Hierarchy of Needs
44
8.3
McGregor’s Theory X and Theory Y
45
8.4
Fred Herzberg’s Theory of Motivation
46
8.5
Peter Drucker’s Goal setting Theory and MBO
46
8.6
McClelland Theory of Needs
47
8.7 Vroom Expectancy Theory
48
8.8 Stacy Adams Equity Theory
49
8.9 Edwin Locke’s Goal setting Theory
50
8.10 Attribution Theory
50
4
8.11 Reinforcement Theory
51
RISK MANAGEMENT OF ENTREPRENEURSHIP DEVELOPMENT
9.1 Entrepreneurial Risk and Hazard
54
9.2 Definition of Risk
54
9.3
Types of Risk
54
9.4
Managing Risk
54
9.5
Risk usually associated with running an Enterprise
56
BUSINESS AND ETHICS IN NIGERIA
10.1 what is Ethics?
59
10.2 Ethics and Decision Making
59
10.3 Ethical Reasoning
60
10.4 Ethics and Law
64
10.4 External sources of Ethical standard
65
10.5 Internal sources of Ethical standard
66
DECISION MAKING IN SMALL SCALE ENTERPRISES
11.1 Introduction
68
11.2 Five Steps involve in decision making
68
11.3 Decision Environment of Managers
69
11.4 Behavourial Decision making
70
11.5 Ethical Dilemma
70
11.6 Methods involve in decision making
72
5
COMMUNICATION PROCESS
12.1 Introduction
73
12.2 One Way versus Two Way Communication
73
12.3 Purposes of Communication
73
12.4 Forms of Communication
74
12.5 The Communication Process
74
12.6 Organizational Communication
75
12.7 Barriers to effective Communication
76
12.8 Improving Communication Process
77
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1.1 ENTREPRENEURSHIP
Entrepreneurship is not a new concept. It existed even before the arrival of the colonial Masters
since People have been owning and transacting business, maximizing profit in their own little
ways without calling it entrepreneurship. The Goldsmith in the history of civilization who kept
people valuables and helped in exchange of goods and services was an entrepreneur. Our
Forefathers who were doing subsistence farming and later diversified into other craft trade to
satisfy their various needs were also into entrepreneurship without knowing it. Hence owing to the
alarming increase of unemployment of Nigeria youths; the dwindling state of our economy; the
Nigeria government saw the need for encouraging people especially our youths to be self reliant,
independent and to own their own business hence the emergence of entrepreneurship development.
1.2 WHAT IS ENTREPRENEURSHIP?
In Spite of the vast numbers of Nigerians in every sector of the economy, several studies have
shown that there is a general lack of entrepreneurial capacity among us. Entrepreneurial capacity
is the ability and willingness of the individual to respond to business opportunities. In a free
enterprise economy creation of wealth and the growth of the economy are the original and sole
responsibility of the entrepreneur. Entrepreneurship can therefore be defined as the willingness
and ability of an individual to seek out investment opportunities, establish and run an enterprise
successfully. The concept of entrepreneurship has been associated with several activities
concerned with the establishment and operation of business enterprise. The activities may involve
identification of
1. Investment opportunities.
2. Promotion and establishment of business enterprise, aggregation of limited resources
required for production and distribution of goods and services
3. Organization and management of human and material resources for attainment of
enterprise objectives, bearing risk and introduction of innovations
1.3 WHO’S AN ENTREPRENEUR?
From the above explanations, He can be seen in the following ways:
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 An Entrepreneur is an individual who owns, controls, organizes and co-ordinates other
factors of production(Land, Labour and Capital) and makes their value greater than before;
he introduces changes, innovations, and a new order, risks his capital in establishing a
business whose profitability can never be determined at a time
 One who is willing and able to take risks with the aim of maximizing profit
The performance of these functions manifest in the birth, growth and survival of an enterprise.
Opportunity seeking behaviour of the entrepreneur is the most important of entrepreneurial
behaviours.
1.4 HISTORY OF ENTREPRENEURSHIP
The use of the word “entrepreneur” dates back to the 17th century French military. At that time, the
term was applied to individuals who lead military expeditors. Richard cantilon and Irishman who
lived in France in the 18th century was credited with being the first person to use the word
“entrepreneur” from the business perspective. To cantillon, an entrepreneur is someone who buys
goods at certain prices with a view to selling them in the future at an uncertain price and by so
doing bearing risk which is not ensured.
About ten years after (1803), Jean Baptise Say came up with what he described as function of the
entrepreneur to include “the bringing together of the factors of production (labour, land and capital)
with the provision of management and the bearing of the risk associated with the venture.
By early part of the 20th century, Joseph schumpter came up with another model which see the
entrepreneur as being the major actor in the change process. According to him, the most important
single function of the entrepreneur was innovation. The general view is that the work of schumpter
was influenced by the earlier work of Max Weber’s (1904). To Weber the main motivating variable
for the entrepreneur was religious beliefs or the protestant work ethic, which established social
norms that did not encourage extravagance, ostentatious and conspicuous consumption and
indolence. The outcome of his approach was higher productivity, more saving and investment. All
these are crucial to economic growth. Weber therefore concluded that the entrepreneurs are
randomly distributed in any ethnically homogenous population
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1.5 OBJECTIVES OF ENTERPRENURSHIP DEVELOPMENT
1. To develop core potential entrepreneurs who are well equipped and capable to start and manage
both shall and medium enterprises successfully.
2. It encourages self – employment and self reliance.
3. To generate employment opportunities for others.
4. To reduce reliance on government and big firms for employment.
5. To reduce loan defaults to the barest minimal.
6. To stimulate rural development
7. Achievement of meaningful level of industrial distribution.
1.6 FEATURES AND TRAITS OF ENTERPRENEURSHIP
1. Self confidence and belief: - The entrepreneur believes in himself and is optimistic and
confident that he will succeed irrespective of the harshness or threats of the environment.
2. Need for achievement: - The entrepreneur’s desire for achievement and profit maximization
pushes him to be hard-working, persistent, initiative and his inner drive moves him towards task
accomplishment. He is in fact, a goal getter and is always not happy with the present methods and
would always want to overcome any obstacle and make the best use of any golden opportunity.
3. Risk-taking:- The entrepreneur is a risk taker, he likes challenges and is not afraid of taking
risk, rather, he makes good use of any opportunity and at the same time tries to minimize risks.
4. Leadership: He has excellent human relation skill, he carries his followers along and gets along
well with others and is responsive to suggestion and criticisms. In fact, he listens to customers and
subordinates.
5. Originality: An entrepreneur is initiative, creative, flexible to changes and resourceful; he is
versatile, knowledgeable and likes originality.
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6. Future Oriented: The entrepreneur has foresight and perceptive skills that helps him to predict
with great accuracy the future market behaviours and also adapt to changes as well as meeting the
requirements of the future market situation always.
7. Task result oriented: He always strives to accomplish his objectives; he is highly determined
to succeed; he is also persistent and hardworking.
8. Self-directed: The entrepreneur is discreetly self-disciplined even though he is his own boss.
This is because he will be responsible for his success or possible failure.
9. Self-nurturing: The entrepreneur must believe in his ideas even when no one else does, and
thus be continually enthusiastic.
10. Highly energetic: He should know that this is his business, therefore, must be emotionally,
mentally and physically able to work hard and for long hours. In fact, he should be a man of energy.
11. Tolerance of uncertainty: Successful entrepreneurs take only calculated risk (if they can help
it). Still, they must be able to take some risks. Remember, entrepreneurship is not for anyone who
is squeamish or bent on security.
1.7 CHARACTERISTICS OF AN ENTREPRENEUR
Certain social – psychological qualities are required for successful performance of entrepreneurial
functions. They include:
1. Entrepreneurial Drive. People who are able to seek and evaluate business opportunity, gather
and co-ordinate all relevant resources and implement action plans to appropriate advantages of
these opportunities, are said to have the entrepreneurial drive (spirit). This drive is important
because it is the inherent motivation of the individual towards tasks. It comprises of such
personality traits as vigour, responsibility, initiative and ambition. Other entrepreneurial
philosophies which are needed include pursuing goals that are related to one’s skill and abilities
and accepting one’s self as one is. This means that the individual should be able to emphasize
his/her area of strength while playing down areas of weakness. A person who have
entrepreneurial drive must be goal-oriented which means that he/she must have the ability to
set up objectives and ensure their attainment. In addition to an ability to indentify business
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opportunities, such persons must be able to implement ideas against all odds (economic, social
and institutional). The individual must be result oriented and posses the spirit of achievement.
2. Communication. Ability to communicate is indispensable in business. A good entrepreneur
should be able to communicate effectively both orally and written. He must be alert enough to
understand and use non-verbal communication also. Effective communication here means
being able to code and decode information. The entrepreneur must understand and be
understood by customers, suppliers, employees and other member of the community. With the
advent of modern communication systems, an entrepreneur who has the capability to use
modern information technology is less likely to be unsuccessful.
3. Risk Bearing. Good entrepreneurs are expected to exhibit low risk aversion. This means that
you need to take realistic risk with high pay off to succeed in business. Conservative
individuals with high risk aversion behaviour do not make good entrepreneurs as they do not
invest in innovative ventures. Gambling is however discouraged because of the high cost
association with the event of failure. Risky situation in business arises when one has to select
between alternatives with known potential which must be evaluated subjectively. Two
individuals are likely to behave differently when they are faced with the same risk situation. It
is the degree of risk aversion that differentiates a good entrepreneur from others.
4.
Leadership. To be a good entrepreneur implies that the person must also be a good leader.
Leadership means influencing the action of others to achieve group or business objectives.
Leaders set goals, co-ordinate resources including human resources to achieve those goals.
Socrates outlined some functions of Leadership which include the following:
a. Selecting the right person for the right job.
b. Punishing the bad and rewarding the good behavior.
c. Winning the good will of those under him.
d. Attracting allies and helpers.
e. Keeping what they have gained, and
f. Being strenuous and industrious in their work.
5. Decision Making. Decision making is an important aspect of any business. Business operators
must at one point or the other be required to take decision about their business. Decisions are
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made based on available information (data). However, it does not always follow that one has
all the information required for the decision making and this is where the good entrepreneur
comes in. An entrepreneur should have a creative and speculative ability. This is the ability of
the individual to use intuition to make decisions. His/ her knowledge, education and experience
come into play in this regard.
6.
Negotiation. A good entrepreneur should possess good negotiation skills. This involves
clarity as to what you want and being able to communicate same to other parties. The
entrepreneur should have the right attitude to negotiation which involves making one’s points
and listening to others makes their own points. He Appreciates that the other party has
something to offer, and therefore listens to him/her. As a negotiator, the entrepreneur must be
attentive enough to note common grounds and areas of disagreement. One should be humble
enough to avoid “winner takes all” position in negotiation. One should be able to concede
some grounds to get all parties committed to agreements reached. Sincerity and honesty are
important in negotiation.
1.8 FUNCTIONS OR TASKS OF AN ENTREPRENEUR.
Entrepreneurs play a huge role in any economy. These roles contribute to the growth and
development of the economy. The roles of the entrepreneur in Nigeria include:
Identification of Investment Opportunities: Investment opportunities abound in the economy
but until they are discovered, they cannot be exploited. As a result of the creative and achievement
drive in entrepreneurs, they seek out these investment opportunities. Nigeria like other developing
countries suffer acute shortage of various goods and services including the basic needs of man.
These scarcities exist and persist because of a lack of entrepreneurial spirit. Understanding the
needs and wants of potential consumers which are currently not being met is the thrust of
identification of investment opportunities. Entrepreneurs come into fill such gaps.
Making Choice of Investment Opportunities: For the entrepreneur to choose between two or
more investment opportunities identified by him, he has to answer the following questions:
a) Is the Project profitable and to what extent?
b) What is his personal interest and desire in the said project?
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c) How available are the required resources that will enhance the production of such goods
and services(resources like capital, technology, suitable site, banking services, insurance
etc.)
d) Is there open opportunity for future growth?
Combination of other factors of production: The entrepreneur combines other factors of
production like land, labour, capital and running of his business enterprise effectively.
Innovation: He is always looking for something new to create in order to satisfy his customers.
He therefore develops new ideas, new products, new technology and even modify existing ones to
serve his customers’ needs better.
Decision Making: He has the ability to make quick, precise, and direct creative decisions that will
help in the growth of his business.
Business planning and Control: A business plan is a detailed written statement that describes the
nature of business, the target market etc. A good entrepreneur must be able to analyze the
competition, calculate how much money they need to start and cover other details of operation.
Good Rapport with government agencies: It is the function of the entrepreneur to be aware of
the various government agencies(local, State and Federal) government regulations and adhere to
them.
1.9 PROBLEMS MILITING AGAINST ENTERPRENEURSHIP DEVELOPMENT IN
NIGERIA
The following problems militate against entrepreneurship development in Nigeria:
Lack of Infrastructural Base: lack of adequate infrastructural constitutes one of greatest
constraints to entrepreneurship development in Nigeria. Most entrepreneurs have to resort to the
provision of basic infrastructures like access roads, water, electricity etc, at great expense for
themselves.
Inadequate Capital: Some entrepreneurs do not have enough capital to help them finance most
of their projects. Most of the time, the financial institution refuse to give them loans owing to some
of the following reasons:
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a.
Inadequately prepared project proposal;
b. Insufficient cash flow documentation;
c. Inadequate collateral securities and
d. The absences of succession plan in the event of death of the entrepreneur.
Insufficient Demand for Products: Insufficient demand for products of the entrepreneur is also
an important constraint. This can be attributed to the generally low purchasing power arising from
consumer’s dwindling real income. To circumvent this, many entrepreneurs have been adopting a
credit sale or credit policy whereby a reasonable proportion of their output is sold on credit for a
limited period at interest free rate. It is observable that these entrepreneurs many a time face
extreme difficulty in recovering such outstanding credits.
Inability to Adjust Prices: Inability of some entrepreneurs to reflect additional costs following
the substantial depreciation of the naira exchange rate. This is largely because doing so makes
them uncompetitive with large scale entrepreneurs. Those who produce for specific industrial
consumers face added difficulty of being price takers.
Poor Educational Background: Many small scale and medium scale entrepreneurs lack relevant
education background, experience and thorough manufacturing exposure. Sequel to this, many of
them are not sufficiently innovative and dynamic to meet growing and expanding business
challenges.
Political instability: This brings about frequent changes in government policies that affect the
entrepreneurs which in-turn leads to inconsistency in planning and controlling activities of the
business.
2.1 DEVELOPING A BUSINESS IDEA
The entrepreneur can develop a business idea by making a scientific observation if his
environment, thinking together with friends and associates, by reading and listing to specialists
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and successful men and women. Through travels you may identify gaps in product availability in
your environment and this may spark off a business idea. Specifically new business could be
identified by a check on the following:
1.Economic Situation of the Area. By analyzing the economy of the area, one may discover the
need for new products. This may lead to recognition of certain comparative advantages that may
exist in the environment. These advantages can come in form of local skills, cheap labour, and
may make a product competitive. Consulting firms may be useful to the entrepreneur in carrying
out this type of analysis.
2. Natural Environment. A good business could start off by undertaking a study of idea of
commodities (crops) that are needed as raw materials in foreign countries. These crops if produced
in large quantity and exported can earn good foreign exchange. They can also be processed locally
and this offers opportunity in the area of establishment of small scale industries.
3. Social Environment. This involves the observation of changes that takes place and involves
human beings. Market trends, change in social value, fashion changes, population changes, lifestyle changes etc, may require new products to meet the current situations. Income increase may
call for luxury products and services. Hardship can also lead to new business ideas. During the
Structural Adjustment Programmer (SAP) in Nigeria many innovations came up to cope with the
situation. In the building industry for instance compressed clay blocks were made and used in place
of cement blocks. Fabrication of the molding machine became a business.
4. Political Environment. A good study and analysis of government policies can lead to new
business ideas. Generally political stability bring about economic growth and the reverse holds
with political instability. For instance, the ban of certain imported goods may lead innovators into
looking for local substitute. Government budgetary allocations to certain sectors may attract
investors and innovation to generate new business in those sectors.
3.1 WHAT IS SMALL SCALE BUSINESS?
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The term small scale business has been used without specific and careful definition of what “small
scale” is. The question bothers on what we can use to accurately measure size? Attempts have been
made to define small scale business in terms of:
I.
Employment
II.
Asset value
III.
Naira sales volume.
All these have proven unsatisfactory in some respects. This irresolution stems largely from the
diverse character of varying industries. A firm in one industry may loom large relative to its
competitor yet be small in employment, assets and sale relative to firms in other industries; or the
reverse may be true. And in some circumstances the firm may be small on the basis of employment
and large in assets and sales or vice versa. Additionally, size expressed in monetary terms (such as
sales and asset value) need to be raised frequently in terms of inflation to reflect changes in the
value of the Naira. For this reason we will lay aside this lack of precision and establish a definition
here by indicating the major attributes of a business which has the financial and managerial
difficulties which were usually associated with small business. Characteristically, a small business
is one that is:
I.
II.
Relatively managed by its owners;
Highly personalized;
III.
Largely local in its area of operation.
IV.
Relatively small size within the industry;
V.
Largely dependent on internal source of capital to finance its growth.
These are the characteristics which give rise to most of its problems and special needs. A small
business is any business in which the owner/ manager is able to recall the first name of his or
her employees.
Small scale business is also seen as one which is owned, managed, controlled by one or two
persons, is family influenced in decision making, has an undifferentiated organizational
structure, has relatively small share of the market and employ less than 50 people.
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The committee for economic development deposed that small scale enterprises are characterized
by at least two of the following features:
i.
Management depends on the owners-the managers are usually the owners.
ii.
Capital is supplied by the owner and his family, and ownership is held by an
individual or small group.
iii.
Area of operation is localized; workers and owners are in most cases from one
family or community. Markets do not need to be localized.
3.2 FEATURES OF SMALL SCALE ENTERPRISES IN NIGERIA
Small scale businesses have certain characteristics which distinguished them from large scale
business and which justify separate analysis of their roles in development. The characteristics of
small scale enterprises in Nigeria may be summarized as follows:
1. Small scale businesses abound everywhere in Nigeria. The numbers of small scale business
are many when compared with large scale businesses. This is because the amount of capital
required to establish them are relatively small and there may be little or no legal provision
to be fulfilled before they are set up.
2. Management is usually independent. This implies that the management and running of
small scale enterprises rests upon the owner-manager. These clearly contrast with large
scale business where the owners are different from the management.
3. There is no much specialization. The owner/manager/proprietor handles or supervises the
financing, production, marketing and personnel of the enterprise.
4. The owner/manager/proprietor does not raise short term, medium term or long term capital
needs of his business from organized financial markets. Instead, he relies heavily on
personal savings, loans from friends, relatives, local or unlicensed credit association and
private money lenders.
5. Small scale enterprise has a small share of the market. The entrepreneur carries out his
vision in the local community in which he lives thus ignoring wider and more distant
markets.
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6. The level of education of majority of small scale business owners is usually low with
consequent low level of business management skills, low level technical skills and market
information.
7. The rate of business mortality is usually very high owing to Poor succession Planning.
8. The owner/ manager knows and is known by all employees and apprentices in the firm.
9. The firm has little or no accounting records. Some of the small scale business owners
believe that the maintenance of the book of accounts and other business records are costly
and unnecessary.
10. Human resources supply depend heavily upon apprentice labour. This is because it is
cheap and as a result helps the proprietor to survive in the highly competitive market with
small and irregular demand for the firm’s product or service.
11. Small scale enterprises in Nigeria are operated as sole proprietorship. In terms of investable
fund, scale of operation, number of people employed, and the size of the business is
relatively small.
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4.1 PROBLEMS OF SMALL SCALE ENTERPRISES IN NIGERIA
There are number of factors which cause small scale enterprises in Nigeria to fail. Some of them
include:
 Under Capitalization: As a matter of fact, all businesses need capital for their operations,
expansion and growth. Since small scale business cannot raise capital from organized
money market, they find it difficult to mobilize enough capital for their daily operations,
expansion and growth. Many of the small scale business units are therefore
undercapitalized which invariably hinder their performance.
 Poor Business Accountability: There is usually poor accountability in small enterprises
with the owner running the business without anyhow he wishes. Cash and goods are taken
at will by the business owner for private use, whenever the need arises, without accounting
for such withdrawals.
This makes it difficult to assess the operating results of the business and at times starves
the enterprise of its liquid resources.
 Poor Record keeping: Some small scale enterprise owners believe that maintenance of
book of accounts and other business records is costly and unnecessary. They defer the
keeping of record on important business transactions such as amount due to be paid to
suppliers and accounts due from customers. Some businessmen believe that keeping proper
record of account is tantamount to inviting trouble from the tax authorities. Others feel that
keeping records will be a source of leakage of business secretes to competitors. These
group of business men fail to realize that keeping of proper book of account will help them
present the information required by the banks and other credit institutions to appraise and
evaluate their credit worthiness.
 Lack of Business Knowledge and Experience: Knowledge consists of facts and theories
that enable people to understand phenomena and to solve problems. A small business
owner who has not acquired enough knowledge about the line of business he/she is about
to enter may likely fail if he did not understudy those already in the business.
 Poor/Wrong Location: where a business is sited is called a location. The factors which
usually influence the location of business include, availability of security, nearness to raw
material, market, sources of power and access to merchandise, labour and transport
facilities etc. Too often location is selected for some superficial reasons such as availability
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of a building to rent or buy, closeness of the facility to one’s home etc. These do not account
for business success.
 Inadequate Planning: Planning involves selecting enterprise objectives and departmental
goals and then finding ways of achieving them. Planning involves considering alternative
course of action and then taking decisions regarding to what to do, how to do it and by who
will do it. A plan is a predetermined course of action which helps to provide purpose and
direction to the members of the enterprise. It also involves evaluating data on resources
and suppliers, customers, relevant government regulations etc. Unfortunately, however,
many eager small business owners push ahead impulsively without paying attention to
planning and consequently leading to business failure.
Unplanned Expansion: Once a business becomes successful there is always an eagerness to
expand it and make it grow bigger. But there is a limit to which a small business would grow,
beyond which it becomes unproductive or inefficient if appropriate planned expansion was not
carried out.
Inadequate Credit Control: A common problem facing small scale business men is whether
or not to grant credit. Those firms that have decided to grant credit must protect themselves
against extending too much credit. They have to apply restraint and wisdom in extending too
much credit to friends and members of their family. Experience show that credits extended to
friends and relations are often too hard to collect in time of need. This in-turn helps to
compound the financial predicament of the small business owner.
Incompetence of Management: The major hazard of a small business is incompetence of
management. A small business owner may not have formal business education/training.
His/her poor management practice may jeopardize his/ her business. He/she may not possess
leadership qualities and may not be willing to delegate authority to appropriate personnel.
Lack of Proper Inventory Control: Since the small scale business manager is a generalist,
he may lack an understanding of the importance of proper inventory control. An inadequate
inventory means that goods are unavailable for delivery to customers when they are demanded.
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Disaster: There are certain circumstances over which the small business owner may have little
or no control. Disaster such as lightning and thunder, fire outbreak, flood, past, drought for
agribusiness or accident or sudden death of the business owners may end the life of the
business.
High Rate of Loan Diversion And Default: No financial institution will be willing to give
loan to a business who has been noted for either loan diversion or loan default. Loan diversion
leads to loan default. Loan defaulters deny the financial institutions the funds with which they
will use to meet the demands of other businessmen.
Inadequate Infrastructural Facilities: There is a dearth of infrastructural facilities like water,
electricity, accessible roads and other means of communication in the rural areas of Nigeria.
Small scale enterprise located in the rural areas are deprived of these facilities. The above listed
facilities are sine qua non to efficient performance of enterprises. Their absence or inadequacy
affect the performance of rural non agricultural enterprises negatively.
Lack of Skilled Manpower: Owners of small scale enterprises are people of average mean
with no specialized skills or experience. Because of financial constraints they are unable to
hire the services of specialists on either part- time or full time basis. As a result, efficiency and
productivity are low hence they cannot survive competition.
4.2 SOLUTIONS TO SOME OF THE DIAGONIZED PROBLEMS
i.
Plan your business properly.
ii.
Keep adequate records.
iii.
Maintain proper accountability.
iv.
Purse only planned expansion.
v.
Enter into line of business in which you have adequate knowledge and experience
of.
vi.
Improve your business knowledge through apprenticeship programmes and formal
education.
vii.
Utilize business and economic factors in locating your business.
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viii.
ix.
Control credit granting practices effectively.
Utilize professional assistance.
4.3 ADVANTAGES OF SMALL SCALE ENTERPRISES
The advantages of small scale enterprises are as follows:
1. Short Lines of Communication: Since there is usually only one level of management in the
small scale enterprises, face to face contact is possible between the manager and his employees,
when giving instructions/ directions. Person to person
relationship/communication
significantly reduces/ eliminates many communication problems encountered in large firms.
2. Profit serves as salary: A key incentive for the small business enterprise is that he is working
for himself. Thus the profit derived from the business operation serves as his financial reward.
Thus this motivates him to put in his best to the business.
3. Close to Decision Making Process: Since there is usually one level management in small
scale businesses the owner/manager is directly involved in all decisions affecting the business.
This facilitates quick decision making as against the situation with large firms where several
consultations might be made before a decision is made.
4. Ease of Entry: One interesting factor about small business enterprises is that the industry is
easy to enter. To start a small business, all that is needed is little capital, business site and
sometimes special operating license from government.
5. High Motivation in the Owners/Managers: The success and failure of the business depends
on the owner/manager. He therefore does everything within his competence to ensure success.
4.3 DISADVANTAGES OF SMALL SCALE ENTERPRISES
1. Risk of Funds: Associated with the advantage of profit making, is the risk of losing the funds
invested. This point is important since the funds invested are either the owner’s or they are
borrowed by the business. Some contingent situations may hit the business and cause the owner
to lose his life time savings or incur liabilities that will take years to pay off.
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2. Lack of Specialization: The owner/Manager of small enterprises performs largely all the
functions involved in doing business. He is a generalist rather a specialist. The owner is the
boss, the accountant, the marketing manager etc. since he may not have the financial muscle
to hire specialist. This tend to pose a danger to the business as against the situation in large
firms where specialists are hired to perform critical functions and activities.
3. Spending long hours at Work: The quest to maximize profit makes some small business
owners to spend long hours doing business. Some of them may leave house very early and
return very late from work. For example some street traders in Nnewi open their shops as early
as 7am and do business up till 8pm in the night. Such business owners have a tendency of
breaking down after sometime and when this happens, the business would close down since it
is a one man affair.
4. Poor Succession Planning: Many small businesses die as soon as the owner dies. Being a one
man business, no one may be capable to take over the business after the demise of the owner.
In some cases, the children of the owner may attempt to take over but lack of adequate training
or knowledge of the profession have often jeopardized the continuity of the business.
5.1 WAYS YOU CAN OWN A BUSINESS IN NIGERIA.
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There are three ways you can own business in Nigeria. These include inheriting an existing
business, buying an exiting business and starting a fresh business.
Inheriting an existing business may occur when one’s father, mother brother or close relative dies
accidentally and the heir apparent will inherit his/her business without any form of preparation.
Operating an inherited business is similar to buying an existing business. The only difference is
that no consideration is provided for inherited business. Inherited business is usually affected by
the lack of managerial capability and skills. Relatives show interest in such business and want to
be involved in all aspects of the business decision. These emotional attachment often lead to
conflicts.
5.2 BUYING EXISTING AN BUSINESS
A potential entrepreneur who wishes to buy existing business may take some or all of the following
into consideration:
i.
Has he the type experience/skills required for running that kind of business?
ii.
Has he enough knowledge to adequately evaluate the business performance from available
sales records, turnover rates and profits over past years?
iii.
Has he the ability to objectively assess the suitability of the business location/site?
iv.
Has he the ability to determine the net-worth of the business?
In summary the potential buyer of an existing business should be able to know:
a.
The reason why the business is put forward for sale.
b.
The profitability of the business (past and potential).
c.
Size of assets a (tangible and intangible) and the liabilities.
d.
The legality of the business or otherwise.
e.
The correct price to pay for the business.
5.3 ADVANTAGES OF ACQUIRING AN EXISTING BUSINESS
i.
Facilities such as building, equipment, inventory and personnel are already on the ground.
ii.
Product and services are already being produced and distributed in the economy.
iii.
There is already an existing market.
iv.
The business has already an established goodwill.
v.
There is an existing measurable cash flow since revenue and profit are being generated.
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vi.
The business site may be very desirable.
vii.
Harmonious relationship may have been established between suppliers, creditors and
customers.
5.4 THE DISADVANTAGES OF ACQUIRING AN EXISTING BUSINESS
i.
The existing facilities such as building equipment and product line may be old and obsolete.
ii.
The staff may be sluggards who have poor productive records.
iii.
There may be very poor labour – management relations in the firm.
iv.
The inventory may contain obsolete stock.
v.
The business location may be poor and insecure.
vi.
Relationship with suppliers, creditors and customers may be very poor.
viii.
Available business records may be deceitful.
5.5 STARTING A NEW BUSINESS
Starting a new business is not an easy task, it involves a lot of considerations before deciding on
which line of business to enter into. A potential businessman should avoid business that does not
provide challenges, opportunities, reward – financial and otherwise.
Starting a new business involves conducting economic survey or feasibility study to find out
whether the proposed line of business is profitable or not. It also involves raising the capital,
choosing the site, sourcing raw – materials, recruiting the personnel, procuring the machines and
equipments, erecting the structures. locating the market, determining the prices, procurement of
vehicles and choosing your distributors, sales, meeting the demands and provisions of the law for
starting and operating such business etc.
5.6 THE ADVANTAGES OF STARTING A NEW BUSINESS
i.
The Entrepreneur has the opportunity to define the nature and scope of his business.
ii.
He can erect the type of physical facilities he prefers.
iii.
The Entrepreneur can take advantage of latest technology in selecting equipments,
materials and tools.
iv.
He has the opportunity of choosing the most suitable physical environment for his
business.
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v.
The Entrepreneur can design most suitable Management information System (MIS)
vi.
He can set standard for his work force.
vii.
The Entrepreneur can utilize the most modern production process and procedure.
viii.
He can start with fresh inventory and set his own inventory, management technique.
5.7 THE DISADVANTAGES OF STARTING A NEW BUSINESS
These include:
i.
The problem of selecting the right business.
ii.
Contending with the problem of unproven performance, records in sales, reliability,
services and profits.
iii.
Problem of raising the required capital sufficient for the procurement of equipment,
materials, building etc.
iv.
problem of choosing the right location.
v.
Problem of selecting the right work – force from the labour pool/market.
vi.
Lack of established product line.
vii.
Problem of identifying the most appropriate market and distribution channels.
5.8 FRANCHISE
A franchise business is a business in which the owners, or "franchisors", sell the rights of their
business logo, name, and model to third party retail outlets, owned by independent, third party
operators, called "franchisees". Franchises are an extremely common way of doing business.
Examples of well-known franchise business models include McDonalds in United states of
America or Mr. Biggs in Nigeria.
5.9 INVESTING IN A FRANCHISE BUSINESS
To invest in a franchise, the franchisee must first pay an initial fee for the rights to the business,
training, and the equipment required by that particular franchise. Once the business begins
operating, the franchisee will continually pay the franchisor an ongoing royalty payment, either
on a monthly, quarterly, or annual basis. This payment is usually calculated as a percentage of the
franchisee operation’s gross sales.
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After the contract has been signed, the franchisee will open a replica of the franchise business,
under the direction of the franchisor. The franchisee will not have as much control over the
business as he or she would have over their own business model, but may benefit from investing
in an already-established, name brand.
5.10 CONTROL OF THE FRANCHISE
Generally, the franchisor will require that the business model stay the same. For example, the
franchisor will require the franchisee to use the uniforms, business methods, and signs or logos
particular to the business itself. The franchisee should remember that he or she is not just buying
the right to sell the franchisor's product, but is buying the right to use the successful and
tested business process.
While there are many benefits to investing in an already – successful franchise business model,
there are drawbacks as well. As with any investment you make, you should do your research
thoroughly before you make any franchise purchasing decisions. If you are considering buying
into a franchise, you should contact an experienced franchise attorney for further assistance.
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6.1 BUSINESS PLANING AND MANAGEMENT
INTRODUCTION
The success of any business depends on the degree and quality of planning that has taken place
before the business starts up. Most entrepreneurs fail because they have not planned well enough
more so, do not have good management techniques thus: planning involves the establishment of
objectives, strategies to achieve the objectives and a step by step determination of the activities
and resources necessary to achieve them. In a nutshell, planning is a blue print for action. Failure
to plain gives rise to ineffectiveness, undirected action and waste of resources.
6.2 BUSINESS PLANNING DEFINED
A business plan is a written document that describes in detail how a business, usually a new one,
is going to achieve its goals. A business plan lays out a written plan from a marketing, financial
and operational viewpoint. A business plan forces potential owners of small business to be quite
specific about the products or services they intend to offer. They must analyze the competition,
calculate how much money they need to start and cover other details of operation. A business plan
is mandatory in any type of serious business investment like banking industries, food and beverage
industries etc.
6.3 THE IMPORTANCE OF PLANNING
1.Planning helps to minimize or avoid waste of money and other resources in business enterprise
2.Detailed planning helps to identify the source of raw materials, equipment, determines delivery
dates, sources of manpower supply as well as sources of working capital.
3.Planning helps the entrepreneur to determine how many employees he must have, the level of
skill and experience, the salary levels and the best way to utilize them
4.Good planning is a pre-condition for better results; it helps to identify the organizational
objectives/ aims and goals.
5.Planning provides direction and a sense of purpose for entrepreneur as it helps to focus attention
on goal achievement.
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6.Planning helps to identify as well as analyze potential business strength, weakness, opportunities,
problems, and at least minimize risks.
7.Planning helps to make better decision, better understanding of the business, better control over
the business direction etc.
8.Through planning and forecasting entrepreneurs keep adapted to their dynamic environment.
6.4 CHARACTERISTICS OF A GOOD PLAN
1. A business plan should be detailed. In listing your products and services for example, you should
not really stop by just enumerating them. You also should write down the descriptions and scope
of your products and services, touch base on production and identify means on how you can market
your "brain - child" to your targeted niche.
2. It should include a market research that identifies your competitors, their share of the market
and the range of the products they produce. By learning how they conduct their operations, you
may learn tricks of the trade in the business you want to enter and you also get to have a basis on
what you can do to excel.
3. It needs to have a list of everything you need. Note that the word everything here comprises of
the equipment, technology, raw materials, financial and other resources that you may need when
starting and running your business venture. Having all these listed will give you an idea on how
much capital you need before you start and how much money should you make in a day to make
your business survive.
4. It also needs to be written in formal format and style. You have to remember that a business
plan is something that you may have to present to your business partners, financial firms and banks.
So if you can, refrain from using slang in any part of your plan.
5. A business plan should be error - free. This is important because your business plan defines
who you are as a business person. If it turned out sloppy, then that does not speak too highly of
you.
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6. Finally, a good plan is realistic and capable of implementation.
6.5 TYPES OF PLAN
Planning most of the time is classified in terms of:
a. Short- range plan
b. Long-range plan
a) Short range plan: This is sometimes called operating plans and is usually from six months
to one year planning. That is plans that only require a short period of time to accomplish; it
covers the business fiscal year.
b) Long range plan: there is no fixed length of time called the long-range plan; it varies with
industries. When executive talk about long-range plans, they often refer to over five years.
That is, a plan that requires a long period of time to accomplish.
6.6 PLANS can also be classified in the following ways:
Start-Up: Detail the steps to start a new business with a start-up business plan. Include sections
describing the company, the product or service your business will supply, market evaluations and
your projected management team. Provide a financial analysis with spreadsheets describing
financial areas including, but not limited to, income, profit and cash flow projections.
Internal: Internal business plans target an audience within the business. Write an internal business
plan to evaluate a proposed project. Describe the company’s current state, including operational
costs and profitability. Calculate if and how the business will repay any capital needed for the
project. Provide information about project marketing, hiring and tech costs. Include a market
analysis illustrating target demographics, market size and the market’s positive effect on the
company income.
Strategic: A strategic business plan provides a detailed map of a company’s goals and how it will
achieve them, laying out a foundational plan for the entire company. A strategic business plan
includes five elements: business vision, mission statement, definition of critical success factors,
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strategies for achieving objectives and an implementation schedule. A strategic business plan
brings all levels of the business into the big picture, inspiring employees to work together to create
a successful culmination to the company’s goals.
Vision and Mission Statement
Mission Statement: The first step in strategic planning is establishing a mission, vision and goals
for the organization. The mission is the basic purpose and values of the organization, as well as its
scope of operations. It is a statement of the organization reason to exist. The mission is often
written in terms of the general clients it serves. For example, the mission statement of Pentecost
Microfinance Bank Nnewi is “to provide varying opportunities for our customers to achieve the
desired self reliance and economic independence by building their wealth on a solid foundation”
The Strategic Vision: It moves beyond the mission statement to provide a perspective on where
the company is headed and what the organization can become. Although the terms mission and
mission are often used interchangeably, the vision statement ideally clarifies the long term
direction of the company and its strategic intent. For example the vision statement of Pentecost
Microfinance Bank Nnewi is “to be a microfinance bank of reference in wealth creation and
financial service delivery”.
Strategic Goals: They evolve from the mission and vision of the organization. Goals are the ends
towards which organizational actions are directed. Just as a mission statement tries to make a vision
more specific, goals are attempts to make a mission more concrete. The chief executive officer of
the organization, with the input and approval of the board of directors, establish the mission, vision
and major strategic goals.
Objectives: These are the operational definition of goals. Goals describe in fairly general terms
what the organization hopes to accomplish, but objectives detail in more precise terms what will
be accomplished in order to reach the goals. The following are the characteristics of a good
objective:
1) They are hierarchical.
2) They are Quantitative or measurable
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3) They are precise.
4) They are realistic or achievable
Feasibility: A feasibility business plan answers two primary questions about a proposed business
venture. Feasibility plans attempt to determine who, if anyone, will purchase the service or product
a company wants to sell, and if the venture can turn a profit. Feasibility business plans include, but
are not limited to, sections describing the need for the product or service, target demographics and
required capital. A feasibility plan ends with recommendations for going forward.
Operations Business Plans: Operations plans are internal plans that consist of elements related
to company operations. An operations plan specifies implementation markers and deadlines for
the coming year. The operations plan outlines employees’ responsibilities.
Growth: Growth plans or expansion plans are in-depth descriptions of proposed growth and are
written for internal or external purposes. If company growth requires investment, a growth plan
may include complete descriptions of the company, its management and officers. The plan must
provide all company details to satisfy potential investors. If a growth plan needs no capital, the
authors may forego obvious company descriptions, but will include financial sales and expense
projections.
6.7 STEPS IN THE PLANNING PROCESS
1.
Establishment of organizational objectives: These are targets that the organization will
pursue in other to be successful. These targets must be such that the organization can easily
attain.
2.
Identification of opportunities: This requires the collection of data to guide the planner.
3.
Selection of course of action/translating the opportunities into selected courses of
action: This is when the plan is put to writing and thus becomes a formal document.
4.
Formulation of specific targets: This involves setting of specific targets, quotas and
quantified statements.
5.
Implementation: this involves the continued review and revision of the initial plan in the
light of its effectiveness or otherwise in actual performance. It requires all good skills learnt
in organizing, leading, controlling etc
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6.
Feedback:
In a nutshell, the six steps in the planning process are:
Establishing of the organizational
Objectives
objectives
Identification of opportunities
Selection of course of Action/Translating the
Opportunities into selected course of Action
Formulation of specific targets
Implementation
Feedback
6.8 MANAGEMENT DEFINED
Management is the process used to accomplish organizational goals through planning, organizing,
leading and controlling people and other organizational resources
6.9 FUNCTIONS OF MANAGEMENT
1. Planning includes anticipating trends and determining the best strategies and tactics to achieve
organizational goals and objective.
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2. Organizing includes designing the structure of the organization and creating condition and
systems in which everyone and everything work together to achieve the organization’s goals
and objective.
3. Leading means creating a vision for the organization and communicating, guiding, training,
coaching and motivating others to work effectively to achieve the organization’s goals and
objectives.
4. Controlling involves establishing clear standards to determine whether an organization is
progressing toward its goals and objectives, rewarding people for doing a good job and taking
corrective action if they are not.
7.1 BUSINESS OWNERSHIP
FORMS OF BUSINESS OWNERSIP
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One key to success in starting a new business is understanding how to get the resources you need.
You may have to get one partners or find other ways of obtaining money. To stay in business, you
may need help from someone with money to expand. How you form your business in your business
can make a tremendous difference in your long-term success. You can form a business in one of
several ways.
In Nigeria, the popular forms of business ownership are:
1. sole proprietorship
2. Partnership
3. Limited Liability Companies
4. Public co-operations
5. Co-operative societies
7.2 SOLE PROPERIETORSHIP. An Organization that is owned and usually managed by one
person is called a sole proprietorship. This is the most common form of business ownership. The
sole proprietor does all activities of business alone; thus he is self-employed, provides capital,
makes decision and shoulders the entire responsibility of risk, by managing, operating and
controlling of business alone. He also enjoys his profit and bears risk of uncertainty. Such form
of business is commonly found in various professions like law, medicine, accounting, agriculture
and in buying and selling of goods and services.
7.3ADVANTAGES OF SOLE PROPERIETORSHIP
1. Ease of starting and ending the business. It is easy to start with minimum cost and there are
not much legal restrictions when you want to get out of the business.
2. Pride of ownership: People who run and manage their own business are rightfully proud of
their work.. They deserve all the credit for taking the risks and providing needed goods or
services.
3.
Leaving a legacy: Business owners have something to leave behind for future generations
to build on.
4. Decisions are quickly made since the owner needs not to consult anybody before taking
action.
5. The owner enjoys privacy since his business account is not made public and sometimes, he
evades tax by not declaring his exact profit.
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6.
Retention of business profits: Besides the joy of being your own boss, there is nothing like
the pleasure of knowing that you can earn as money with anyone else.
7.4 DISADVANTAGES OF SOLE PROPRIETORSHIP
1. Unlimited Liability: The risk of personal loses. When you own your own business, you
and your business are considered one; any debts or damages incurred by the business are
your debts and you must pay them, even if it means selling your own personal belongings
to do so.
2. Limited financial resources: Funds available to the business are limited to the funds that
the one sole (owner) can gather. Financial institutions are reluctant to give him loan
because of inadequate collaterals securities. Therefore, personal funds accruing from
savings are usually small and inadequate.
3. Management difficulties: All business need management that is someone must keep
inventory records, accounting records, etc. Because of the inadequate capital, it is often
difficult to employ good and qualified people to help run the business.
4. Limited life span: If the sole proprietor dies, is incapacitated or retires, the business no
longer exists (unless it is sold or taken over by the sole proprietor’s heirs)
5. Limited growth: Expansion is often slow since a sole proprietorship relies on its owner
for most of its creativity, business know how and funding.
6. There is secrecy in business: He is not required by law to publish his account for the
general public thereby keeping his business activities private.
7.5 PARTNERSHIP
A partnership arises whenever two or more people co-own a business and share in the profits and
losses of the business. In a partnership, each person contributes something to the business -- such
as ideas, money, property, or some combination of these. Management rights, profit share, and
personal liability will vary depending on which of the three modern partnership forms the business
takes: general partnership, limited partnership, or limited liability partnership (LLP). Below are
basic summaries of the main types of business partnerships.
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General Partnerships: A general partnership involves two or more owners carrying out a business
purpose. General partners share equal rights and responsibilities in connection with management
of the business, and any individual partner can bind the entire group to a legal obligation. Each
individual partner assumes full responsibility for all of the business's debts and obligations.
Limited Partnerships: A limited partnership allows each partner to restrict his or her personal
liability to the amount of his or her business investment. Not every partner can benefit from this
limitation -- at least one participant must accept general partnership status, exposing himself or
herself to full personal liability for the business's debts and obligations. The general partner retains
the right to control the business, while the limited partner(s) do(es) not participate in management
decisions. Both general and limited partners benefit from business profits.
Limited Liability Partnerships (LLP): Limited liability partnerships (LLP) retain the tax
advantages of the general partnership form, but offer some personal liability protection to the
participants. Individual partners in a limited liability partnership are not personally responsible for
the wrongful acts of other partners, or for the debts or obligations of the business. Because the LLP
form changes some of the fundamental aspects of the traditional partnership, some state tax
authorities may subject a limited liability partnership to non-partnership tax rules.
7.6 Advantages of Partnership

Capital – Due to the nature of the business, the partners will fund the business with start
up capital. This means that the more partners there are, the more money they can put into
the business, which will allow better flexibility and more potential for growth. It also means
more potential profit, which will be equally shared between the partners.

Flexibility – A partnership is generally easier to form, manage and run. They are less
strictly regulated than companies, in terms of the laws governing the formation and because
the partners have the only say in the way the business is run (without interference by
shareholders) they are far more flexible in terms of management, as long as all the partners
can agree.

Shared Responsibility – Partners can share the responsibility of the running of the
business. This will allow them to make the most of their abilities. Rather than splitting the
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management and taking an equal share of each business task, they might well split the work
according to their skills. So if one partner is good with figures, they might deal with the
book keeping and accounts, while the other partner might have a flare for sales and
therefore be the main sales person for the business.

Decision Making – Partners share the decision making and can help each other out when
they need to. More partners means more brains that can be picked for business ideas and
for the solving of problems that the business encounters.
7.7 Disadvantages of Partnership

Disagreements – One of the most obvious disadvantages of partnership is the danger of
disagreements between the partners. Obviously people are likely to have different ideas on
how the business should be run, who should be doing what and what the best interests of
the business are. This can lead to disagreements and disputes which might not only harm
the business, but also the relationship of those involved. This is why it is always advisable
to draft a deed of partnership during the formation period to ensure that everyone is aware
of what procedures will be in place in case of disagreement and what will happen if the
partnership is dissolved.

Agreement – Because the partnership is jointly run, it is necessary that all the partners
agree with things that are being done. This means that in some circumstances there are less
freedoms with regards to the management of the business. Especially compared to sole
traders. However, there is still more flexibility than with limited companies where the
directors must bow to the will of the members (shareholders).

Liability – Ordinary Partnerships are subject to unlimited liability, which means that each
of the partners shares the liability and financial risks of the business. Which can be off
putting for some people. This can be countered by the formation of a limited liability
partnership, which benefits from the advantages of limited liability granted to limited
companies, while still taking advantage of the flexibility of the partnership model.

Taxation – One of the major disadvantages of partnership, taxation laws mean that partners
must pay tax in the same way as sole traders, each submitting a Self Assessment tax return
each year. They are also required to register as self employed with HM Revenue &
Customs. The current laws mean that if the partnership (and the partners) bring in more
38
than a certain level, then they are subject to greater levels of personal taxation than they
would be in a limited company. This means that in most cases setting up a limited company
would be more beneficial as the taxation laws are more favourable

Profit Sharing – Partners share the profits equally. This can lead to inconsistency where
one or more partners aren’t putting a fair share of effort into the running or management of
the business, but still reaping the rewards.
7.8 FORMATION OF COMPANIES:
According to the statutory corporation and Allied Matter Decree (CAMD) of 2004 which was
promulgated to guide the operations of the company; it requires shareholders to elect a board
of directors who will provide overall policies for running the affairs of the companies. The
major documents required for a company to be incorporated (whether private or public) are as
follows:
1. Articles of Association
2. Memorandum of Association
3. Prospectus
7.9 ARTICLES OS ASSOCIATION:
This refers to the rules and regulations governing the internal administration of the company.
It contains:
I.
Matters/condition for issuing and transferring shares
II.
Powers and responsibilities of the board of directors
III.
Voting rights of members
IV.
Dividends, account and audit
V.
The right and different classes of shareholders.
7.10 MEMORANDUM OF ASSOCIATION
It deals with the information concerning the company’s relationship with the public. It specifies
the terms under which the company will exist as a corporate entity. It contains the following:
a) The name of the company
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b) The aims and objectives of the company
c) Location of the registered office
d) A specification of whether the company is private or public
7.11 Advantages of a Limited Liability Company
Limited liability: As the name implies, members’ liabilities for the debts and obligations of the
LLC are limited to their own investment. This is one of the key advantages of a limited liability
company. In other words, if your company gets sued, your personal assets, like bank accounts and
real estate, are protected. At most, you can only lose the money you put into the business, and
nothing else.
Keep in mind that this protection is not all-encompassing. Members can still be held liable for
criminal behavior or if they neglect to follow certain rules about business management. Consult
with a lawyer to make sure you are not violating these rules and exposing yourself to personal
liability.
Pass-through taxation: For taxation purposes, income from your business can be treated as your
own personal income, and is therefore not subject to certain federal taxes for which corporations
are liable.
Limitless ownership: Some legal structures limit the number of people allowed to file as owners.
With an LLC, there is no limit to the number of owners. An LLC can have one member or hundreds
of members.
Allocation flexibility: In an LLC, the amount of money that owners invest into the business
doesn’t need to equal their percentage of ownership. When an LLC is formed, members create an
operating agreement, in which different percentages of company profits and losses can be assigned
to owners regardless of the amounts of their initial investments. So you can make a deal with an
investor to have them finance half of your business without necessarily owning have of your
business.
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Freedom in management: Unlike standard corporations, LLCs are not required to have a board
of directors, annual meetings, or strict book requirements. This can free up a lot of time and stress
to let you run your business on your own terms. As you can imagine, this can be an important
advantage of a limited liability company as well.
7.12 Disadvantages of a Limited Liability Company
Building capital: Unlike corporations, which can issue stock in order to increase funds for their
companies, LLCs have to work a little harder to find investors and sources of capital due to the
greater legal obligations and state filings involved to add a new member to an LLC. If you have a
fast growth internet company that needs venture capital to scale, this limitation is one of the major
disadvantages of a limited liability company.
Higher fees: LLCs must typically pay more fees to file as LLCs compared to some other business
entities or sole proprietorships. Additionally, many states require yearly renewal fees. However,
these fees are usually less than what a C-corporation has to pay.
Government regulation: Because of the protections afforded to LLCs, some types of businesses
are ineligible to file as LLCs. Banks, insurance companies, and medical service companies are
examples of businesses that may be barred from filing in your state. These rules can vary from one
state to the next, however. So find out from a business formation lawyer whether an LLC is a
possibility for your company.
Lack of case law: The LLC business form is a relatively new concept. As a result, not a lot of
cases have been decided surrounding LLCs. Case law is important because of predictability. If
you know a court has ruled a certain way, you can act accordingly to protect yourself. But if few
laws have been established yet, there is a certain level of vulnerability with your operations that
could expose you to greater liability.
Taxation: Although LLCs allow owners to avoid federal taxes, your firm may actually end up
paying more that it would with a different model, depending upon your state’s personal income
tax requirements, and the nature of the business. Working with an accountant and/or tax lawyer is
a really good idea when planning your business and forming your LLC.
41
Confusion across states: The rules regarding LLCs vary from state to state. If you decide to start
doing business in multiple states, it may become tricky to understand and abide by all the
requirements of each state, and in some cases it may be necessary or preferred to form subsidiary
entities to operate in other states.
7.13 CO-OPERATIVE SOCIETY
It is a form of business organized not with profit as a the basic guiding motive but with the
fundamental objective of organizing and rendering services to its members. A cooperative society
is essentially an association of persons who join together on a voluntary basis for the furtherance
of their common economic interest. This implies association of individuals on equal terms to fulfil
their economic needs to promote thrift and self-help among themselves.
7.14 TYPES OF CO-OPERATIVE SOCIETY
1. Consumer’s co-operative societies
2. Producer’s co-operative
3. Co-operative thrift and credit societies.
1. Consumer’s Co-operative Societies: It is an association of consumers who buy goods in
bulk at wholesale prices and sell them at retail prices to both members and non-members
of the cooperatives. Thus they eliminate middlemen activities and supply better quality
goods at cheaper prices to the members.
2. Producer Co-operatives: An association of producers of a particular commodity who
come together for the purpose of either of producing the commodity or marketing their
products. A number of producers could pool their resources and produce jointly.
3. Co-operative thrift and credit societies: They are formed by a number of persons with
the aim of either saving money together or making it possible for them to borrow money
easily from banks. The money contributed or saved can be lent to members at very reduced
interest than commercial banks and other financial institutions.
42
MOTIVATIONAL PATTERN OF AN ENTREPRENEUR
8.0
Motivation Defined:
Motivation is one of the simplest and yet so complex of entrepreneurs job. It seems simple because
people tend to be basically motivated or driven to behave in a way they feel leads to rewards.
43
Therefore, one of the determinants of behaviours is motivation. It is that which moves you towards
your goals.
Thus, motivation - behavior – performance. Hence, an entrepreneur who is concerned with
performance, is an entrepreneurs concerned with motivation.
Motivation can be defined as a driving force within an individual produced by a state of
tension that exists as the result of an unfulfilled need.
In essence, motivational programmes in any organizational setting try to create conditions that
encourage workers to satisfy their needs while accomplishing company objectives. There are
various motivational programme but the most popular of them all are management by objectives
job enrichment and the incentives systems. Management by objective (MBO) assumes that people
need specific targets (goals) for accomplishment.
Job enrichment takes its queue from Herzberg's theory that employees have two sets of needs
Hygiene and motivational needs. Examples, if hygiene needs are not fulfilled, they can cause the
workers to become unhappy. On the other hand, motivational needs are themselves, present on the
job; they include the need for growth, recognition and advancement. Thus, to adequately motivate
an employee, job to be modified (or enriched) so that such an employee is challenged and
stimulated by the work itself.
8.1 Importance of Motivation / Motivating Employees in a Small Scale Business
When you run a small business, every kobo counts when you waste the intelligence, energy or
skills of your employees, its like throwing money out of the window. Abrams in his book says,
the surest way to get the best value from your employees is to treat them with respect.
When you allow your employees to think about how to solve problems, not just carry out specific
task, you can unleash an amazing amount of creativity and energy. To do so, however, they need
information, patience and a sense that they will not be published, if they make an honest mistake.
To help employees be more productive, Abrams recommend that you:
44
a.
Train your employees to do a wide variety of tasks: In small business, employees have to
pitch in on many jobs, so instead of teaching them specific tasks, you need to teach them about the
whole business and encourage problem solving.
b.
Communicate Frequently: set out about 15 minute motivational sessions everyday where
employees complement each other for recent behaviours, both minor and major as well as share
something, raise individuals self esteem and set the tone for the rest of the day.
c.
Empower your employees to make decisions. Let them use their initiatives sometimes.
d.
Acknowledge their contributions.
Thus, it is often very difficult for a small company to match the financial benefits of large
companies. So, it is even more important for small business owners to make every employee feel
valued since when your employees grow, your business is more likely to grow.
8.2 ABRAHAM MASLOWS'S HIERARCHY OF NEEDS
This is the theory of motivation that places different types of human need in order of importance,
from basic physiological needs to safety, social, esteem needs and self actualization needs.
Maslow's hierarchy of needs level are as follows:
Physiological needs includes basic survival needs such as the need for food, water and shelter.
Safety needs: the need to feel secure at work and at home.
Social needs: the need to feel loved accepted.
Esteem needs: the need for recognition and acknowledgment from others as well as self respect
and a sense of status or importance.
Self actualization needs: The need to develop to one's fullest potential.
Maslow propounds that when one need is satisfied another higher level need emerges and
motivates the people to do something to satisfy it. The satisfied need is no longer a motivator. For
45
example if you just ate a full course dinner,
hunger would not be a motivator for some
hours and your attention might turn to your surrounding (safety needs) or family (social needs).
Of course lower level needs (e.g thirst) may emerge at anytime, when they are not met, they will
take your attention away from higher level needs such as the need for recognition or status. The
chart below shows the Maslow’s various level of needs.
Self-actualization needs
Esteem needs
Social needs
Saftey needs
Physiological needs
Maslow's hierarchy of needs is based on the idea that motivation comes from need. If a need is
met, its' no longer a motivator so a higher level need becomes the motivator.
8.3 Mc GREGOR' S THEORY X AND THEORY Y: Douglas
McGregor
observed
that
individuals who work in organizations have attitudes which generally fall into either of the two
entirely different sets of managerial assumptions, which he called theory X, and theory Y.
Theory X
The assumptions of theory X management areas follow:
a.
The average person dislikes work and will avoid it if possible
b.
Because of this dislike, workers must be forced, controlled, directed or threatened with
punishment to make them put forth the effort to achieve the organization goals.
c.
The average worker prefers to be directed and wishes to avoid responsibility.
46
d.
An average employee places security above every factor related to work and they have
little ambition.
This negative attitude of managers and entrepreneurs in theory X made them believe that
employees cannot be fully trusted and needed to be closely supervised so they tell them
(employees) what to do and how to do it.
Theory Y
Theory Y made positive assumption about people as follows:
a.
Most people like work, it is a natural as play or rest
b. Most people naturally work toward goals to which they are committed
c. The depth of a person's commitment goals depends on the perceived reward for achieving them,
d. Under certain conditions, most people not only accept, but also seek responsibility:
e.
People are capable of using a high degree of imagination, creativity and cleverness to solve
problems
Rather than emphasize authority, direction and close supervision, theory Y emphasizes a relaxed
managerial atmosphere in which workers are free to set objectives, be creative, flexible and go
beyond the goals set by Management. A key technique in meeting these objectives is
empowerment. Empowerment gives employees the ability to make decisions and the tools to
implement the decisions they make.
8.4 FRED
HERZBERG'S
THEORY
OF MOTIVATION
He is another proponent of motivation with the concept of the two-factor theory. He used the result
of the experiment he carried out with his group on 200 engineers in 1959 to draw a conclusion on
motivation. The engineers were asked to recall when they had experienced satisfactory and
unsatisfactory feelings about their jobs. From the results, Herzberg and his group concluded that
there were a group of factors which resulted to satisfaction, which they called motivators. These
factors mostly had to do with job content and when present, they result in good performance e.g.
possibility of growth, recognition, responsibility,
47
achievement advancement and work itself
Herzberg and his group however identified other elements called the hygiene factor
maintenance factor)
which
(or
had to do mostly with the job environment and could cause
dissatisfaction if missing but would not necessarily motivate employees if increased e.g. company
policy
and
administration, supervision, working conditions, interpersonal relation
(Co-
workers), salary, status and job security.
When McGregor's Theory Y with Herzberg’s motivating factors are combined the following
conclusion would emerge:
1.
Employees work best when management believes they are competent and self motivation
(Theory Y). Theory Y calls for a participative style of management.
2.
The best way to motivate employees is make the job interesting, help them to achieve their
objectives
8.5
and recognize that achievement through advancement add responsibility.
PETER
DRUKER'S
GOAL
SETTING THEORY AND MANAGEMENT BY
OBJECTIVES (MBO)
Goal setting theory is based in the notion that setting challenging but achievable goals will lead to
high levels of motivation and performance if the goals are accepted, accompanied by feedback and
facilitated by organization conditions. This means that there should be a system to involve
everyone in the organization in goal setting and implementation.
Druker developed such a system in the 1960s and asserted that managers cannot motivate people
but can only thwart people's motivation because people motivate themselves. So he developed a
system to help employees motivate themselves called management by objectives (MBO). It is a
system of goal setting and implementation that involves a cycle of discussion, review and
evaluation of objectives among top and middle level managers, supervisor and employees.
Six Steps of management by objective
The critical step in the MBO process is sitting down with workers, discussing objectives and
getting the workers to commit to these objectives. Thus you have:
1.
Goals are set (by manager with cooperation of subordinates)
48
2.
Departmental objectives are set, including -deadlines
3.
Individual objectives are set (by) manger and individuals in writing)
4.
Constant two-way communication occurs regarding progress towards objectives.
5.
Results are evaluated
6.
Employees are rewarded for achieving
8.6 McClellands' Theory of Needs
John W. Atkinson proposed three basic needs or drives that motivate people. These are the Need
for Achievement, the Need for Power and the Need for Affiliation or close relationship with others.
This proposal was later confirmed in a research carried out by David McClelland.
The Need for Achievement (n'ach), which is related to how well employees would want to do their
jobs, makes them to take calculated risks in setting moderately difficult goals and demand for
feedbacks. The n'ach people desire success and are always afraid of failure. They desire
challenging but achievable goals. Extensive difficult and unachievable goals would usually lead
to frustration They do gamble but prefer to analyze and assess problems; they assume personal
responsibility for getting job done and they are restless and like to work long hours.
The Need for Power (n'pow) group of employees, would always want to be in charge of the
situation; they want to control their environment, including people and material resources, to
benefit either themselves (personalized power) or others (socialized power). People who have high
need for personalized power use it for their own sake while those in high need for socialized power
use it to help others like in dealing with the social sector - solving human problems within the
society. They want to assume leadership positions believing in themselves and the contributions
they can make because they believe in themselves as knowing "the answer". Both fear of failure
and success can activate this need. Those who have been threatened toward failing by factors
within an environment can be motivated by the need for power; so also are those who have
succeeded and would not want to give it up.
The Need for Affiliation (n’aff) deals with the need for socialization, belongings and acceptance.
This category of people likes to be loved and always fear rejection especially by a social group.
They prefer maintaining friendly relationship, seeking approval from others and avoiding conflict
49
as much as possible. The effectiveness and efficiency of completing their jobs may sometimes be
jeopardized because they want to maintain cordial relationship.
Managers should therefore, look closely into the needs of their employees and match them ' with
commensurate jobs. As motivators for n’ach, managers should assign challenging but moderately
difficult jobs with a lot of feedback. Since this group also seeks out a lot of responsibilities, they
should be given the freedom or autonomy to do so. For those with high need for power, they should
be assigned to positions that will enable them to exercise such power. However, restraint should
usually be exercised to avoid the abuse and misuse of power. The group with the need for affiliation
would naturally fit in comfortably without much difficulty since organizational managers would
also ensure that there are facilities for socialization within the organizations. However, because
this category also depends a lot on individuals, personality problems may still be noticed since the
organization cannot force people to be friendly or accept others.
8.7 Vroom's Expectancy Theory
Victor Vroom is credited for postulating the expectancy theory in the 60s. This theory which is
said to be the most widely accepted in the explanation of motivation, suggests that individuals are
motivated at work to make choices among different alternative behaviour which they believe
(expect) will lead to a preferred reward (outcome) that will be attractive to them. This means
individuals' choices of behaviour are based on the expectation of attractive outcomes. Therefore,
the effort exerted to perform any task and achieve any goals is guided by the type of reward that
will follow the action. The expectancy theory of motivation is explained by this model
M= f (E x 1 x P)
or M = f (E x I x V)
Where M = Motivation
E
=
Expectancy
I
=
Instrumentality
P
=
Preference (valence)
The above model means that motivation is a multiplicative function of the Expectancy (E) of the
individual that a particular level of performance will lead to a specific outcome (1) which is
preferred (P) or liked (V) by him. In other words, Valence (V) means the attractiveness or the
motivating power of the reward. While some rewards or outcomes may be attractive and preferred,
others may not and this depends on the importance individuals attach to them.
50
Three relationships also evolve from the expectancy theory:
i. Effort-performance relationship - the expectation that a particular level of exerted effort would
lead to a particular level of performance.
ii. Performance—reward relationship- the expectation that a particular performance level will lead
to a particular outcome or reward.
iii. Reward-personal goal relationship or valence- the expectation by an individual that the reward
will be attractive and therefore, satisfy his/her needs.
In explaining the relationships, the implication for managers is to understand the role of perception
in motivation. Perception influences the effort expended which employees believe will lead to an
acceptable performance level. Managers should, therefore, let individuals know beforehand, the
level of performance expected of them and the reward which would follow. This information,
depending on the value (valence) attached to the reward, will make employee exert much effort or
just enough to perform the usual duties.
8.8 Stacy Adam's Equity Theory
Equity theory, credited to Stacy J. Adams, explains how individuals make comparisons on the
rewards (output) given to them as a result of their contributions (input) with that of others to see
whether it is fair or not. Equity theory is a theory of motivation expressed as a ratio of a person's
inputs and outcomes with other's inputs and outcomes with a view to detecting inequity. It can be
expressed in the form shown below;
Outcome of a person
Input of a person
=
outcome of other person(s)
inputs of other person(s)
For equity to exist at any time, both sides of the ratio must be balanced. At any time individuals
feel that inequity in outcomes exist, they are bound to be dissatisfied and such can be expressed
the following ways among others:
1.
They may reduce their inputs, that is, the energy and intensity expended in doing work.
2.
They may resort to pilfering organizational resources.
3.
They may accept the situation by actually believing that their inputs are not as much as
those of others.
4.
They may even quit and leave the organization completely.
51
The implication of the equity theory for managers is for them to realize that the equity theory has
to do with perception. It is only when employees perceive that they have been inequitably treated
that they will react in any of the ways stated above. Since no methods have been provided for
restoring equity, managers must take cognizance from the outset in ensuring that employees, as
much as possible, are equitably treated by ensuring that reward system is carefully administered.
8.9 Edwin Locke’s Goal-Setting Theory:
Goal-setting theory, by Edwin Locke, proposed that people are motivated to work towards goals
or objectives they set for themselves or they are part of. By being part of the whole process, people
understand what and what are involved and therefore, are better disposed to working more
effectively towards achieving the goals. Being part of the goal-setting process is therefore, the
driving force as far as motivation is concerned.
The message of the goal-setting theory is that individuals are motivated to work towards the
attainment of reasonably challenging, clear, and verifiable goals. Locke's research actually showed
performance improvement when individuals were allowed to set specific rather than vague goals
for themselves. Personal commitment is also increased when individuals understand the goals
which they participated in setting. Goal setting theory can therefore, be said to resemble
management by objective (MBO) on the grounds that when goals are verified, feedback on
performance is given, chances of improvement are increased.
The implication of the goal-setting theory is for managers or superiors to allow their subordinates
to set goals for themselves, these goals are of course, reviewed to ensure that they are in line with
the total organizational objective.
8.10 Attribution Theory
This is the theory that explains how people judge others' behaviours, whether they are internally
or externally caused. Peoples' behavior can be internally caused when they can determine and
control their actions, like whether to go to work early or not or whether to work hard or not.
Individuals' behaviour can also be externally caused when they cannot control circumstances
leading to their actions. For instance, organizational rules and regulations can constrain employee
action or a major accident blocking the road to work can result to employee lateness to work on a
particular day or during a particular period.
52
Attribution to the cause of any behaviour can be made in three ways:

The extent of their distinctiveness-meaning how different the behaviour is from the usual,

The extent of their consensus-meaning how far everyone concerned is faced with the situation
and

the extent of their consistency-how far the response to the cause is uniformed over time.
Attribution theory is actually a theory of motivation which explains what happens when people
are perceived to be either motivated or not. In Cole's explanation, he maintains that under internal
attribution, the individual can be said to be unmotivated while a motivated employee is depicted
by the external attribution column.
The implication for management will be to study the attitudes of their employees to discover when
they start exhibiting behaviours that show lack of motivation. This is very important since such
attitudes, if not detected on time, can go a long way towards affecting organizational productivity
adversely.
8.11 Reinforcement Theory
B.F. Skinner, a Harvard Psychologist and his Associates developed a technique for motivation
maintaining that the consequences of past behaviour would affect future actions, in a cyclical
learning process. The process can be depicted as shown.
Stimulus -> Response -> Consequences -> Future action.
The stimulus is the situation or event which emanates from the environment. An individual reacts
to stimulus through some type of behaviour which is the response. If the consequence is pleasant,
the individual will respond in similar manner in future but if it is unpleasant, the individual will
change his/her behaviour to avoid any unpleasant consequences. This follows the law of effect by
Thorndike which maintains that people try to avoid disobedient actions because they have
previously learnt that such result to punishment. They rather try to do things that will attract
positive reward to them.
Reinforcement theory links motivation and behaviours. The relationship expressed above has led
to using reinforcement theory to change behaviour termed behaviour modification. Employee
behaviour can therefore be modified by changing the consequences. This process is termed operant
conditioning. For instance, a habitual noise maker's behaviour can successfully be modified
53
towards a desired response to suit the teacher's purpose and benefit the whole class and
organization. The four methods of reinforcing or modifying behaviour are Positive reinforcement,
negative reinforcement, punishment and extinction.
Positive reinforcement: This involves recognizing and therefore encouraging employee desired
behavior. This will help to increase or maintain d frequency of the behavior.
Negative Reinforcement: This involves the use of negative consequences like criticisms, to make
employees desist from an undesired behavior.
Punishment: Heavier negative consequences like queries, dismissal, suspension are used to
discourage undesired behavior in an Organization.
Extinction: This involves the complete non application of any type reinforcement or stimulus so
as to modify an undesirable behavior.
The managerial implication of the theory can be to apportion reward early enough to follow
desirable behaviour in order to spur others. Managers may not punish every wrong doing; some
can be discouraged.
RISK MANAGEMENT OF ENTERPRENEURSHIP DEVELOPMENT
9.1 ENTREPRENEURIAL RISK AND HAZARD
Risk is the chance an entrepreneur takes of losing time and money on a business that may not
prove profitable eventually. Even among companies that do make a profit, not all make the same
amount. The companies that take high risk may make high profit. There is a lot of risk involved
54
in opening a fast food franchise in a big city because insurance and land costs there are usually
higher than in less urban areas. But the higher risk you take, the higher the rewards you may get.
9.2 Definition of risk: Risk is defined as the likelihood or the statistical probability of failure in
an enterprise. The term risk refers to the chance of loss, the degree of probability of loss, and the
amount of possible loss.
9.3 Types of Risk
The two major types of risks are speculative risk and pure risk.
1.
Speculative Risk:
This type of risk involves a chance of either profit or loss. It includes
the chance a firm takes to make extra money by buying new machinery, acquiring more inventory,
and making other decisions in which the probability of loss may be relatively low and the amount
of loss in known. An entrepreneur takes speculative risk on the chance of making a profit. In
business, building a new plant is a speculative risk because it may result in a loss or a profit.
Another example of speculative risk is inflation where debtors gain and creditors loose because of
the reduction in the value of the currency.
2.
Pure Risk: This is the threat of loss with no chance for profit. Pure risk involves the threat of
fire, accident or loss. If such events occur, an entrepreneur or company loses money but if
the events do not occurs,
the entrepreneur of company gains nothing. This means that, there is
no possibility of gain in case the loss occurs.
9.4 Managing Risk
The management of risk is a major issue for 'businesses throughout the country.
The risk that is of most concern to business people is pure risk. Pure risk threatens the very
existence of some firms. Once such risks is identified, firms have several options:
a.
Reduce the risk
b. Avoid the risk
c. Self-insure against the risk
55
d. Buy insurance against the risk
a.
Reducing Risk: A firm can reduce risk by establishing loss-prevention programs such as fire
drills, health education, safety inspections,
equipment maintenance, accident prevention
programme and so on. Employees as well and managers can reduce risk; for example, truck drivers
can wear seat belts to minimize injuries from accidents, operators of loud machinery can wear
earplugs to reduce the chance of hearing loss, and those who lift heavy objects I can wear back
braces. The beginning of an effective risk management strategy is a good loss
prevention
program. However, high insurance rates have forced some people to go beyond merely preventing
risks to the point of avoiding risks and in extreme cases by going out of business.
b. Avoiding Risk: Many risks cannot be avoided. There is always the chance of fire, theft, accident
or injuring. But some companies are avoiding risk by not accepting hazardous jobs, not introducing
new products and the likes. An organization can eliminate the risks associated with cash by dealing
only in cheques.
c. Self-insuring; Many entrepreneur and companies have turned to self insurance because it lowers
the cost of insurance by allowing companies to take out insurance only for larger losses. Self
insurance is most appropriate when a firm has several widely distributed facilities. The risk from
fire, theft or other catastrophe is then more manageable.
One of the more risky strategies for self-insurance is for a company to "go bare," paying claims
straight out of its budget. The risk here is that the whole firm could go bankrupts over one claim,
if the damages are high enough. A less risky alternative is to form risk retention group insurance
pools that share similar risks.
d. Buying Insurance to cover Risk: This is the same as shifting the risk to another person.
Although well-designed, consistently enforced risk-prevention programs reduce the probability of
claims from accident. Insurance is the armor individuals, business and non-profit organizations
use to protect themselves from various financial risks. For this protection, such organizations spend
about 10% of their profit on insurance premiums.
9.5 RISK USUALLY ASSOCIATED WITH RUNNING AN ENTERPRISE
Insurable Risk and Uninsurable Insurable risk
56
An insurable risk: This is one that the typical insurance company will cover generally,
insurance companies use the following guideline when evaluating whether or not a risk is
insurable:
1. The policy holders must have an insurable interest, which means that the policyholder is the one
at risk to suffer a loss. You cannot, for example, bur fire insurance on your neighbour’s house and
collect if it burns down.
2.
The loss should be measurable
3.
The chance of loss should be Measurable
4.
The loss should be accidental
5. The risk should be dispersed; that is, spread among different geographical areas so that no
natural disaster in one area would be able to bankrupt the company.
6. The Insurance company can set standards for accepting risks.
Uninsurable Risk: This is one that no insurance company will cover. Example of things that
cannot be insured include:- Market risks e.g. losses that occur because of price changes, style
changes or new products that make your product obsolete, political risks (e.g. losses from war or
government: restriction on trade); strikes or inefficient machinery)
Controllable and Uncontrollable Risk
i.
Controllable risks: This is associated with internal risks which may be controlled to
some extent by way of careful planning, precautions and adequate research efforts,
examples of such risks are:- accidents on the jobs, bad debt, labour unrest, theft of
properties.
57
ii.
Uncontrollable Risk: These are the risks I that an Organisation/entrepreneur cannot
control. Examples are natural disasters, price changes,
taste of consumers, technological
changes etc.
BUSINESS AND ETHICS IN NIGERIA
10.1 WHAT IS ETHICS? Different scholars have viewed the subject of ethics in different ways.
It is the study of how our decisions affect people. It is also the study of people's right and duties,
the moral rules that people apply in making decision, and the nature of the relationships among
people. Ethics is “a set of roles that define right or wrong conduct... it deals with fundamental
human relationship (Fredrick et. al., 1988). Ethics is the study of what is good or bad, right and
58
wrong, and just and unjust (Steiner and Steiner, 1991). It is the study of moral principles or values
that determine whether actions are right or wrong and outcomes are good or bad (McShane and
Glinow, 2000). The Longman Dictionary of Contemporary English defines Ethics as moral values
or principles of behaviour for deciding what is right or wrong.
BUSINESS ETHICS: Business Ethics is not so different from individual ethics since individuals
make up business organizations. If individuals already have high ethical standards displayed in
their private lives, then introducing same into business will not pose any problem: Business ethics
is still the study of good and bad, right and wrong and just and unjust actions as applied to business.
10.2 ETHICS AND DECISION MAKING: Decision making is the act of choosing among
alternatives. It is a very important component of any organization because decisions are made
every day before actions are taken. How ethical business decisions are becomes a question that
must be asked answered by every organization. This becomes even very important as business
decisions result to outcomes that have consequences and the more consequential the decision
outcome the more important the ethics of the organization or decision maker becomes.
Philosophers, theologians and logicians have through their study of ethical issues, suggested
guideline that may be applied by managers in arriving at any decision. They are egoism, altruism
and formal principle.
Egoism (Maximum Personal Benefit) results when managers base their decisions solely on selfish
motives, adopting the maxim that individuals should always seek that which is pleasurable or try
to avoid pain.
Altruism (Maximum Social Benefit) refers to a decision situation where a manager chooses the
alternative that produces the greatest happiness to the greatest number and this is said to be the
most difficult decision to make.
Decisions that apply “obligation to a formal principle” appear midway between egoism and
altruism and are based on the dictum that the rightness or wrongness of an action depends on
principles, not consequences. Therefore, unlike egoism and altruism which consider consequences
of decisions, formal principle considers rule or policy and some authors believe that “the Golden
rule” can easily be applied to this guideline.
59
Managers who are guided by formal principle can either base their decisions on the Golden Rule
- do unto others as you would wish they do unto you or they may adopt the categorical imperative
which is a situation where one acts as if the maxim of one's action were to become a general law
binding on everyone. Some individuals opposing categorical imperative may adopt a more
pluralistic approach which would contain a list of many principles arranged in a hierarchy; Such
as the following principles:
i.
Place the interest of society before the interest of the organization.
ii.
Place the interest of the organization before manager's private interest.
iii.
Reveal the truth in all instances of organization and personal involvement.
10.3 ETHICAL REASONING: Ethical reasoning deals with taking a decision when faced with
an ethical dilemma. An illustration will help to make the explanation clearer. A drug manufacturer
or a pharmaceutical firm has produced a drug which has been proved to be harmful for human
consumption. NAFDAC after thorough investigation orders the organization to recall the drugs
and stop further production immediately. But the sale of this particular drug has revived the
hitherto ailing drug company. Withdrawal of the drug from the market will definitely affect the
company adversely; the action may even lead to eminent collapse of the firm.
The drug company, however, has been ordered to stop production and recall the drug from market
shelves. Ethical reasoning has to be applied in taking a decision between recalling the drug, and
allowing the company to collapse, or advertently ignoring the order of NAFDAC; distributing the
drug and endangering people lives.
Methods of Ethical Reasoning
Generally, there are three methods of ethical reasoning. They are Utility, Rights and Justice as
illustrated by this diagram.
60
Method
Critical
Limitations
determining
An action is ethical
factor
when ...
Net benefits
Difficult to measure human
and social costs. Majority may
Utilitarian
Comparing
exceed net
benefits and cost
cost
disregard rights of majority
Basic human
Difficult to balance conflicting
rights.
Rights
Respecting rights
rights are
respected
Benefits and
Difficult to measure benefits
and costs Lack of agreement
Justice
Distributing fair
costs
are
fairly
on fair shares.
distributed
Share
Utility: This refers to the overall usefulness of an action. Utilitarian reasoning considers the costbenefit effect of a particular decision, policy or action and it is said to be result-oriented because
it determines whether the overall outcome produces more good than harm - more 'utility' or
usefulness than negative results for all concerned. Utilitarianism is therefore applied to any view
that holds that actions and policies be evaluated based on the costs and benefits they will impose
on the society - where the right action or policy is the one that will produce .the greatest net benefit
or the lowest net cost) (when all alternatives have only net costs).
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The concept of utilitarianism has been summarized in these statements:
i.
An action is morally right if it produces the greatest good for the greatest number of people
affected by it.
ii.
An action is morally right if the net benefits over the cost are greatest for all affected, as
compared to the net benefit of all other possible choices considered.
iii.
An action is morally right if it's immediate and future direct and indirect benefits are
greatest for each individual, and if these benefits outweigh the costs of those considered for other
alternatives.
Right: Rights are said to be entitlements of individuals bestowed on them by the virtue of their
human existence and they are also a basis for making ethical judgments. Fredrick et al. (1988) in
Nnabuife & Ikon(2008) defines rights in this manner, “... that a person or a group is entitled to
be treated in a certain way”. The same source maintains that the most basic human rights are
those claims or entitlements that enable a person to survive, to make free choices and to realize
one’s potential as a human being and that it becomes unethical attempting to deny them these.
In a democratic system people have the right to vote and to be voted for provided they have not
infringed on any law that goes against such. Human beings in such system have the right to
freedom of speech and the right to ask the leader they voted into office to be accountable for his
stewardship to them. Even in undemocratic settings, in human beings still have right to survive
and make free choices and any action that will go against such basic right is termed unethical.
Ethical reasoning, therefore, insists that people are to be treated as valuable ends in themselves
because they are human beings. Sexual discrimination or any type of discrimination meted to
human beings is unethical because it denies women or any other group the opportunity of
exercising their basic rights as human beings. Developed countries presently preach against
marginalization of human beings through acts that tend to suppress human beings from living and
.existing freely. Indiscriminate dumping of refuge, emitting dangerous gas, congestion or other
types of activities that tend to endanger human lives are said to be unethical. Fredrick et al. (1988)
believe that human beings have the right to exist in a clean environment.
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Justice: The principle of justice is the third method of ethical reasoning. Generally, people come
up with questions like, “Is it fair or is it just” But the fairness of any action depends on peoples
areas of interest. Consumers are after fair pricing of products and services for instance, while
employees discuss the fairness of any pay package. Students would ask questions on fairness as
far as the grading of their quizzes, test or examinations and also on tuition, and other fees. The
above and many other examples represent questions of justice and fairness. The problem is
therefore when justice exists and with which yardstick it is measured?
Justice (or fairness) exists when benefits and burdens are distributed equitably and according to
some accepted rule, and rewards and punishments are meted out evenhandedly. Justice is
therefore mostly concerned with fairness and equity in the distribution of social goods according
to need, the acquisition of property, unity of mankind and even on granting everyone the same
starting advantages in life - to health, to education and to career choices.
According to Fredrick et. al. (1998), justice reasoning is different from utilitarian reasoning. In
applying utilitarian reasoning, one agrees that an action is ethical when the benefits exceed the
cost But in using justice reasoning to determine whether an action is ethical or not, the person who
pays the cost and who gets benefits are considered - if the shares seem fair (according society’s
rules, then the action is probably just). By implication reasoning along utilitarian basis ends up
with net sum but justice reasoning considers fair share. For example, the relocation of a company
from one city to another reveals that the utilitarian would say ‘yes’ to the proposition if net benefits
to all parties are greater than the cost incurred by everyone but a person applying justice reasoning
would say yes if the benefits and costs caused by the move were fairly borne by parties affected
by the move.
10.4 ETHICS AND THE LAW: Ethics has been generally defined as the study of what is good
or bad, right or wrong, and just and unjust; the study of people’s right and duties, the moral rules
that people apply in making decision, and the nature of the relationships among people among
other definitions. Law is said to be similar to ethics because both are rules defining proper and
improper behaviours. According to Fredrick et al. (1988), “laws have an ethical basis because they
are society’s attempt to formalize its rules regarding right and wrong behaviour... sometimes there
is not a perfect match between the law and important ethical principles”. It is a simple truth that
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sometimes what is regarded as unethical may be legal, therefore “legality cannot always define when
something is ethical and unethical.
10.5 UNETHICAL BUSINESS PRACTICES IN NIGERIA
Nwachukwu (1987), a Management scholar listed the most common unethical business practices
in Nigeria as follows:
i.
Outright bribery
ii.
Unfair practices in pricing
iii.
Price discrimination
iv.
Dishonest advertising
v.
Price collusion by competitors
vi.
Cheating of customer
vii.
Unfair credit practices
viii. Shoddy weights and measures.
The author further listed factors determining ethical decisions and factors determining unethical
decisions as follows:
A.
Factors Determining Ethical Decisions
i.
A man's personal code of behavior
ii.
Behaviour of a man's superior in the company
iii.
Formal company policy
iv.
Ethical climate of the Industry
v.
Behaviour of a man's equal in the company.
B.
Factors Determining Unethical Decisions
i.
The behaviour of a man's superior in a company
ii.
Ethical climate of the industry
iii.
Behaviour of a man's equal in the company
iv.
Lack of company policy
v.
Personal financial needs.
10.6 EXTERNAL SOURCES OF ETHICAL STANDARD
They are as follows:
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1.
Family: The family is often a core source of the presence or absence of ethical standards. In
addition, it provides pressure to succeed and earn adequate income. Thus, it may or may not
support ethical behaviour.
2.
Religion: Religious teachings may be very powerful, but in a secular society they often fail
to translate into influencing manager's decision making under pressures.
3. Friends: Peer groups outside of a work setting may help buffer the manager against workrelated pressures, but many managers do not feel comfortable discussing these kinds of issues with
friends. Those outside an enterprise may find it easy to condemn a decision if they don't understand
the pressure facing a manger who must struggle with complex ethical issues.
4.
Culture: The culture plays a very important role in ethical issues but most times when people
are under pressure, they tend to ignore the provisions of their culture.
5.
Professional Association: Many professional associations have began to emulate the older
professions of medicine and law in developing ethical codes. Codes can provide some protection
to professionals within an enterprise. The standards outlined in these codes may be used to help
resolve conflicts that arise between an employee's professional role and his or her enterprise role.
However, as professionals become managers, they move further from their professional roles and
find ethical conflicts more difficult to resolve.
6.
Law: The law is essentially the officially compiled customs or practices of a society.
Unfortunately, it has two major limitations: (a)
It does not incorporate many ethical dimensions
and sensibilities that go beyond mere legal requirements; and
(b)
Because law enforcement mechanisms are imperfect, many violators are not caught,
prosecuted, convicted or punished. Although the law helps guide managers with regard to socially
responsive decision making; simply refraining from the illegality is often not enough.
7.
External Competitors. External competitors are very important to an enterprise. Perceptions
of those competitions' behaviour will put a lot of pressure on enterprise managers to respond in
kind. Those behaviours may deal with new products, new market strategy, or unethical behaviour.
Experience suggests that most people perceive others as generally less ethical than themselves.
Therefore, managers may suspect that their competitors are not being fully honest and ethical in
their dealings. Trade groups and personal networking may help allay this fear of unfair competition
to some extent. But, if a manager perceives-correctly or incorrectly-that the competition is being
65
unethical, he or she will still have to deal with the fundamental issue that "everybody else is doing
it; so why shouldn't I?"
10.7 INTERNAL SOURCES OF ETHICAL STANDARD
1.
Superiors: one should be able to look to one's superiors as role models for behaviour. But
unfortunately from an ethical point of view, they can be models of negative as well as positive
behaviour. In addition, they may implicitly, or even explicitly, encourage or demand unethical
behaviour on the part of their subordinates. The simple pressure to succeed, to perform, or to meet
production schedules or cost levels may induce subordinates to resolve ethical questions in an
enterprise's interest- at least in the short run
2.
Peers/Colleagues: Peers can be a source of ethical support as well as a source of ethical
compromise. They are likely to understand that the pressure a manager is facing, may simply
become a source of ethically negative peer pressure. This type of pressure may be just as true
among mature managers as it is among teenagers.
3.
Subordinates: Managers are highly dependent on their subordinate since they must
accomplish their assigned objectives through supervising the efforts of others. Thus, subordinates
can exert a lot of pressure on managers to conceal their inadequacies since such failings may reflect
on the managers themselves. This issue most often takes the form of falsification of document and
reports to superiors. This "problem hiding" rather than "problem surfacing", interferes with
effective management. It also may compromise managers and open them to subtle forms of
blackmail on the part of subordinates.
4. Enterprise Objectives: Objectives provide strategic direction for an enterprise. They also may
be a major source of pressure to behave unethically.
5.
Enterprise Code: In recent years, it has become increasingly popular for enterprises to have
their own ethical codes. "Code of corporate conduct" may simply identify what behaviour is
appropriate and what is not. Everyone agrees with such codes, but they do not serve to effectively
guide behaviour because they are so general that managers are still left to deal on their own with
the ethically messy nature of real world decision making.
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6.
Enterprise Evaluation and Reward Systems: This is a key issue for enterprise that want to
be serious about encouraging ethical behaviour. They must be careful not to reward one type of
behaviour when they really want another kind.
7.
Internal Competitors: In some ways, this source of pressure is a combination of the work
of the peer group and the external competitors influence on managers. Again, perception often run
wild in terms of how unethical others are thought to be, so managers may be tempted to "join them,
if they can't beat them" and behave unethically themselves.
11.0 DECISION MAKING IN SMALL SCALE ENTERPRISES
11.1 INTRODUCTION
Decision making is the process of identifying a problem or opportunity and choosing among
alternative courses of action. Decision is the selection of alternative course of action from available
alternatives in order to achieve a given objective. The decision process is influenced by the unique
environment of the decision maker, his organizational position, available information (knowledge)
and experience in decision making. A decision is a choice aimed at achieving optimum result in a
given direction.
All managers no matter what their precise roles are continually involved in
decision making.
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Decision making as had been said is the process of identifying a problem or opportunity and
choosing among alternative courses of action. There are very few cases in practice where only one
decision is clearly the right one. It is the manager's task to weigh alternative opportunities and
make decisions-within the framework of his resources in the time-scale available.
Further, decision making depends in the first place on the manager having a clear picture of what
he is trying to achieve. He must understand what the problem really is. Secondly, decision making
involves choosing from a number of possible consequences. Thirdly, there is the crucial problem
of selecting the optimum solution. In practice, decision often have to be made quickly and the
manager may have to make one which is satisfactory rather than ideal. A decision is normally
better than non at all. Finally, since decision-making is wholly directed towards achieving
objectives/action plans, decisions must clearly be communicated to those concerned.
11.2 FIVE STEPS OF SYSTEMATIC DECISION MAKING
The five basic steps involved in systematic decision making are systematically from the definition
of a problem or the opportunity to follow-up.
i.
Recognize and define the problem or opportunity.
ii.
Identify and analyze alternative courses of action.
iii.
Choose a preferred course of action.
iv.
Implement the preferred course of action
v.
Evaluate the result and follow up as necessary.
,
11.3 DECISION ENVIRONMENTS OF MANAGERS
Problem solving decisions in organizations are made under three different conditions or
environments such as:
i.
Conditions of certainty;
ii.
Condition of risk; and
iii.
Condition of uncertainty.
Environment of Certainty
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This exist when information is sufficient to predict the results of each alternative in advance of
implementation. When a person invests
money in a savings accounts, for example, absolute
certainty exist about the interest that will be earned in a given time. Certainty is an ideal condition
of managerial problem solving and decision making. The challenge is simply to locate the
alternative offering a satisfactory or even ideal solution.
Environments of Risk
Environments of risk involves lack of complete certainty regarding the outcomes of various
courses of action but some awareness of the probabilities associated with their occurrence. A
probability in turn is the degree of likelihood that an event will occur. Probabilities can be assigned
through objective statistical procedures or through, managerial
intuition.
On
the
other
hand, a senior production/purchasing manager can make estimates based on the past experience.
Risk is a fairly common decision environment faced by managers.
Environments of Uncertainty
Environment of uncertainty exist when managers are unable to assign probabilities to the outcomes of various problem solving alternatives. This is the most difficult of the three decision
environments. Uncertainty forces managers to rely heavily on individual and group creativity to
succeed in problem solving. It requires unique, novel and often totally innovative alternative to
existing patterns of behaviour. Responses to uncertainty are often heavily influenced by intuition,
guesses and hunches, all of which are heavily influenced by perception.
11.4 BEHAVIOURIAL DECISION THEORY
Behaviourial decision theory is the idea that people act only in terms of what they perceive about
a given situation. Behaviourial decision theory states that people act only in terms of what they
perceive about a given situation. But such perceptions are often imperfect. Rather than facing a
world of complete certainty, the behaviourial decision maker is seen as acting under uncertainty
and with limited information. Managers make decisions about problems that are often ambiguous;
they have only a partial knowledge about the available action alternatives and their consequences
and they choose the first alternative that appears to give a satisfactory solution of the problem.
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This model is referred to by Herbert Simon as a satisfactory style of decision making.
Satisfying is choosing the first satisfactory rather than the optional decision alternative. Simon and
colleague state that:
Most Human decision making whether individual or organizational is concerned with the
discovery and selection of satisfactory alternatives; only in exceptional cases is it concerned
with the discovery and selection of optimal decisions.
The key difference between manager's ability to make an optimum decision in the classical style
and tendency to make a satisfying decision in the behaviourial style is the presence of cognitive
limitations and their impact on our perceptions. Cognitive limitations impair our abilities to define
problems, to identify action alternatives, ideal solution and predict consequences. These cognitive
and to choose alternative limitations are so important in the day-by-day world of the manager that
intuition and judgment become highly priced.
10.5 ETHICAL DILEMMA
Ethical Dilemma - is a situation in which a person must decide whether or not to do something
that-although benefitting oneself or the organization or both-may be considered unethical and
perhaps illegal.
DECISION MAKING CHECK LIST
"The most common source of mistakes in management decisions is the emphasis on finding the
right answer rather than the right question."
The checklist below highlights the basic steps involved in the decision making process.
1.
Have you identified the causes and extent of the problem?
i.
Why has the need for a decision arisen?
ii.
Have you identified all the factors involved in the problem? '
iii.
Have you pin-pointed the really critical issues?
iv.
Is it an out-word symptom of a more complex problem?
v.
Is this one of a sequence of similar problems? If so, are there other factors to consider?
2.
i.
What circumstances will affect your method of dealing with the problem?
Is the problem totally within your competence? Or your area of responsibility?
ii.
How much of the work involved will you delegate and to whom?
iii.
What social ethical and environmental factors are involved?
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iv.
Is this a priority matter when related to other work in:
a.
Your department; and
b.
Your organization?
v.
What are the practical constraints in terms of available, resources, time and cost?
vi.
Have similar problems been successfully solved previously? Can you approach the current
problem along similar lines?
vii. Can a temporary measure be brought in to ease the problem while looking for a more lasting
solution?
3.
Have you identified your long and short term objectives?
i.
Do they cover every part of the problem?
ii.
Are they feasible in the light of practical and other considerations?
iii.
Are they in the interest of your organization as a whole?
iv.
Have you taken into account future plans for expansion and change?
4.
Have you collected the relevant data/information?
i.
Have you specified accurately what you require?
ii.
Where can the necessary data/information be obtained?
iii.
Do you know what the decision will cost?
iv.
Have you made full use of the experience within your
i
organization?
v.
Could external help be profitably used?
vi.
Is the information presented in a suitable form?
vii.
Is it reliable and valid?
viii.
Is the information sufficient for you to base your decision on?
ix.
In the course of collecting data/information, have you altered the problem area?
x.
Are your objectives still relevant and feasible?
5.
Have you explored possible alternative solutions?
i.
Have you made a list of possible lines of action?
ii.
Have you assessed the problem out-come in each case? '
iii.
Can problem areas be simulated by scientific techniques of analysis?
iv.
Would a decision model of the whole problem area be useful?
v.
Have the critical issues been obscured by minor problems which may be involved?
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vi.
Will you need to modify your original objectives?
6.
What action is required to implement your decision?
i.
What action must be taken, and when?
ii.
How long will each stage take to complete?
iii.
Who will implement the decision? How and when should they be informed?
iv.
Who should be informed of your decision?
v.
What effect will your decision have on others?
vi.
Have you established a system of follow-up and control?
vii. What are the established system for evaluating and monitoring the project?
11.6 METHODS OF DECISION MAKING
One mistake made by many new managers is presuming that they must solve the problem and
make the decision themselves. In practice managers end up in making decision in any or all of the
following ways:
i.
ii.
Individual decisions - are decisions made by one individual on behalf of the group.
Consultative decisions - are decisions made by individual after seeking input from or
consulting with members of a/group.
iii.
Group decisions - are decisions made by all members of the group, ideally with consensus
being achieved.
Good managers know when and how to use each of these methods. The basic goal, of course is
always to make good decision. That is, one that is high in quality, timely and understandable and
acceptable to those whose support is needed for implementation.
12.0 COMMUNICATION PROCESS
12.1 Introduction
Communication is the process of transmitting information from the sender to the receiver with the
intention of making out meaning. It is a process that goes on throughout any organization's life.
Communication, therefore, plays a very important role in keeping everyone informed of every
event within an organization. Special attention should therefore, be paid to this inevitable process
that dictates the survival and sustenance of any outfit.
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12.2 One-Way Versus Two-Way Communication
One-way communication involves the transmission of information from the sender to the receiver
without any feedback from the receiver. When a manager sends a memo to the subordinate to act
on, there is no immediate feedback until the duty is completely performed. It is usually faster and
easier for the sender who does not have to answer any questions immediately.
Two-way communication occurs when the receiver sends a feedback to the sender in the form of
a question or mere response. With the feedback, ambiguities are cleared and communication is
made both complete and effective. Any of the two can be used depending on the nature of
information being transmitted.
12.3 The Purpose and Importance of Communication
Communication, as already mentioned, is very important in any organization because it plays an
inevitable role both within and outside the organization towards the accomplishment of its goals.
Specifically the purpose of communication rests on fact that it facilitates the achievement and
furtherance of an organization's objectives. It is, therefore, important in the following ways:
i.
To establish and disseminate the goals of an organization
ii.
To develop the plans for their achievement
iii.
To organize human and material resources in the most effective and efficient way
iv.
To select, develop and appraise members of any organization
v.
To lead, direct, motivate and create a climate in which people want to contribute, and
vi.
To control performance
12.4 Forms of Communication
Communication can come in these four main forms: oral, written sign and electronic.
i.
Oral/Verbal Communication: This includes face to face discussion, telephone conversation and
formal presentation of speeches or addresses. It is usually very fast and saves cost. It also makes
room for feedbacks through questions, suggestions and corrections which make it more effective.
ii.
Written Communication: This includes memos, letters, invitations, reports, files etc. Depending
on the volume required of any form, it is faster in that a lot of people can receive the information
within a short time. Written communication also creates room for permanence of the records which
can be retrieved and used whenever the need arises. It also gives the receiver adequate time to read
and give meaning to the content. Written communication does not give room for immediate
73
feedback, it may be clearly and out rightly misunderstood or it may not be properly disseminated
to the right persons. The information intended may therefore never be received.
iii. Non-verbal Communication: In an age of equal opportunity, sign communication which is mostly
transmits gestures, has become very important especially for the blind, the deaf, and the dumb. If
these handicapped group should be educated or become gainfully employed, there is need to
establish special schools where they must be trained by qualified people. Though it is not yet in
common use especially in developing countries but those who are skilled in this area have lots of
advantages. Gestures can also be used effectively by those who are not handicapped in any way to
communicate selected information.
iv.
Electronic Media: This form of communication has taken an alarming dimension through
improved technologies made possible by research. The various forms include computers, cell
phones and beepers.
Computers have enhanced communication in so many ways and these include the use of electronic
mails (e-mail), instate messaging (popularly called charting) and video conferencing. Electronic
mails can be used to pass information both within and outside an organization using the internet.
On the average presently, most homes have either Desk tops, Lap tops and some even Palm tops
and, the transmission of information therefore continues to improve speedily as research in
technology continues to advance.
12.5 The Communication Process
The process of communication are the steps involved in the complete transmission of information
from the sender to the receiver allowing room for feedback and covering the noise as well. The
process starts with the purpose which gives rise to the thought and configuring of the message to
be sent which is then encoded. The encoded message then takes the form of speech, memo or
gesture. Every message goes through a channel which is the medium through which the message
travels to the receiver.
Usually channels are chosen depending on the type of communication. In organizations, mostly
formal means are used and they are spelt out in the form of memos sent down from the top
management to the lower levels.
TheCommunicationProcess.
Receiver
Sender
74
Receive
Message
Decode
message
Message
Takes
form
Encode
Message
Transmission
of message
NOISE
Decode
Feedback
Receive
Feedback
Transmission
of
Feedback
Encode
feedback
Receiver
Feedback
takes
Form
Sender
The message is received through the channel and decoded. The decoding step is the meaning given to the message
by the receiver. The meaning can be distorted by noise or other barriers effective communication. Whatever meaning
that is given to the received information is revealed in the feedback. The feedback also goes back to the sender and
this act as a check and an assessment of the successful transmission of the correct information. The figure above shows
that feedback goes almost through the same steps of encoding the intended message before choosing a channel.
12.6 Organizational Communication
Organizational communication can be divided into four – downward, upward, diagonal and informal communication.
1.
Downward communication is one directional from managers, heads of unit or supervisors to employees
down organizational authority hierarchy. It can take the form of assignment of duties to subordinates, instructions
concerning a particular job or a feedback in reaction to earlier questions from subordinates. Downward
communication can either be written in form of memos, e-mails, or even other official letters, or verbal which is mostly
face-to-face.
2.
Upward communication is also one-directional flowing from the lower level of the organization, from
subordinates to higher levels, to superiors. It keeps middle and senior management abreast of events within an
organization. Upward communication can take the form of situation reports, submission of completed assignments,
response to queries, suggestions or even observations. It can also be in written or oral form.
3.
Horizontal communication comprises of information flow between departments, units or peers who are
on the same level of an organization in hierarchy. It performs the functions of firstly allowing the sharing of
75
information, coordination and problem solving among units. Secondly, it also gives room for the resolution of conflicts
and thirdly, the interaction among peers which is made possible through such communications. It provides an avenue
for social and emotional support needed by people and these boast morale and effectiveness.
4.
Informal Communication is unofficial, non-sanctioned transmission of information. The three forms of
communication already discussed are all formal because they are officially sanctioned, and they are needed for
achieving effectiveness in the performance of task within any organization.
The commonest type of informal communication and about the only one yet known and most popularly discussed is
the grapevine. The grapevine is the social network of informal communications that helps people interpret the
organization, translates management's formal message into employee language, "and conveys information that the
formal system leaves unsaid. Four types of grapevine chains include: the single stand, gossip, probability and cluster
chains.
In the single-strand chain, one person tells another who tells another, and it goes on like that. For the gossip chain, one
person tells everyone the information he/she has. It is used to disseminate interesting but non-job related information.
In the probability chain, people pass information at random without caring who receives and those that get the
information transmit it in the same random manner. For the cluster chain, one person conveys the information to a few
selected individuals and only some of the people that get it will inform a few selected persons.
Grapevine, though usually viewed negatively because of its informal nature, has proved to be a very important source
of information. It can, however, be destructive when irrelevant or erroneous gossip and rumours proliferate and harm
operations .
12.7 Barriers to Effective Communication
There are certain problems that tend to create barriers which eventually distort effective communication in
organizations. These barriers can be sourced from the sender through the channel used, at the point of reception or
even during the feedback. Some of these barriers are discussed below.
1.
Poor Expression: Poor expression can arise from poorly chosen words, lack of coherence, awkward
sentence structure, lack of understanding of the language being used etc. It can also be as a result of speech impairment
which leaves the sender somewhat helpless. This barrier can be overcome through feedbacks since the message is
usually verbally communicated.
2.
Emotion: Causes of emotion range from depression, extreme excitement or happiness. Any message
transmitted during any of these and other emotional moments tend to be distorted because rationality may be
completely lost. Information passed during these times should be ignored.
3.
Selective Perception: Hearing what one wants to hear can also be a source of communication barrier but
76
this is not without a previous problem. Selectively taking information can be based on needs, motivation, experience,
background or other personal characteristics. The same is also the case with looking and seeing what one wants to see.
People sometimes see what is not there because of some type of bias. Interest and expectation can also be a source of
selective perception. Overcoming this barrier will therefore, depend on the receiver who must extinguish the bias but
this is not easy since it is usually personal.
4.
Filtering: This refers to the sender’s effort to purposefully manipulate information in order to please the
receiver, making him hear what he wants to hear. This usually results from fear of transmitting bad news and seeking
favour from a superior. Filtering is a common problem with upward communication. This problem may be difficult
to solve since sycophants and "boot lickers" are present in every organization, and will always seek where power is
most powerful and "dance" to their advantage.
5.
Overload of Information: This is caused when too many messages are sent at the same time. Because
people have a finite capacity of processing information, when more than they can process is received, there occurs
information overload. This problem is usually very common with today's executives who must process information
received through many sources like e-mails, phone calls, faxes, meetings reports, instant messaging to remain current.
To overcome this barrier, executives and even secretaries must sieve out the less important information and work with
only the relevant data.
6.
Noise: Noise constitutes great barrier to effective communication. A good example can drawn from the
experience in a noisy classroom. Information disseminated in a noisy atmosphere can hardly be well received.
7. Fear: This is another barrier to effective communication. This can be a source of problem when a superior is
reputed for being vindictive or is perceived to be so.
8. Poor Listening skill: Some people lack good listening skill and this can also hinder effective communication. This
involves people allowing themselves to be distracted by frivolities when an important information is being
disseminated. For example some people can be chewing gum during when important lecture is going on.
9. Semantics: Semantics can equally become a barrier since the same slogan or phrase can mean different things to
different people.
12.8 Improving Communication Effectiveness
Since the success or failure of any organization, to a considerable extent, depends on the effectiveness of its
communication networks, all and sundry are expected to work towards ensuring that such is achieved. Certain
guidelines have however, been prescribed for improving communication in organizations. For oral communication,
the following can be applied:
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i.
Clarify the purpose of the message
ii.
Use intelligible encoding
iii.
Consult others' views
iv.
Consider receivers' needs
v.
Use appropriate tone and language
vi.
Get feedback
vii.
Consider receivers' emotions and
viii.
Listen attentively
motivations
For improving written communication, these guidelines can also be applied:
i.
Use simple words and phrases
ii.
Use short and familiar words
iii.
Use personal pronouns (such as "you") whenever appropriate
iv.
Give illustration and examples; use charts.
v.
Use short sentences and paragraphs
vi.
Use active verbs, such as "The manager plans..."
vii.
Avoid unnecessary words
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