FEDERAL UNIVERSITY DUTSE

CENTRE FOR ENTREPRENEURSHIP DEVELOPMENT

NUC - DRAFT TRAINING MANUAL FOR GENERAL ENTREPRENEURSHIP

COURSES IN UNIVERSITIES

GST 311 – INTRODUCTION TO ENTREPRENEURIAL SKILLS

COURSE 2: BUSINESS CREATION AND GROWTH

COURSE DESCRIPTION
The aim of this course is to develop students’ competence and confidence in creating viable
businesses with high potentials for new value addition and high income. The course is designed
to enable students achieve economic independence after graduation. Its main goal is to help
change students' mindset away from paid jobs and over-dependence on families and government.
By the end of the course, students will be able start and manage businesses at micro or at family
level. They will also be able grow ventures capable of generating employment and better utilize
resources.

COURSE OBJECTIVES
 To enable students’ appreciate the importance of businesses in the society
 To make students recognize the need to grow existing businesses
 To enable students appreciate the value the importance of family businesses
 To challenge students to continuously diversify the scope of businesses
 To expose students to management principles and best practices

METHODS OF DELIVERY
This course will be taught using lecture approach, mentoring and practical in business
incubators/ existing businesses. Contemporary business growth models and best practices in
business management will be used by the facilitators. A book of reading is to provide some
insights and guide to students. Assessment of the program would be by written examination and
continuous assessment .Topics to be covered includes:

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 COURSE CONTENT

MODULE 1: Concept of Business and New Value Creation Financing

Learning outcome
Upon the completion of this module, you will have
 Understand the concept of business planning
 Explored the concept of business start-up
 Examined the process of opportunity search and identification
 Discussed the legal issues of start-ups
 Learnt viability analysis of new ventures and new venture financing

MODULE 2: Theories of Growth: An Overview

Learning outcome
Upon the completion of this module, you will have
 Understood the concept of business growth
 Explored the strategies for growth (franchising, buy in and buy out)
 Examined merger and acquisitions
 Discussed the challenges of growth
 Learnt viability analysis of new ventures and new venture financing

MODULE 3: Sources of Funds

Learning outcome
Upon the completion of this module, students will have
 Discussed the source of funds for new and entrepreneurial ventures
 Understood the importance of formal and informal sources of funds for new ventures
 Explored the concept, method, and type of finances provided by venture capital
 Discussed the various government initiatives in funding new ventures and small and
medium enterprises in Nigeria.

MODULE 4: Marketing
Learning outcome
Upon the completion of this module, you will have
 Discussed the concept of small marketing
 Understood the fundamental differences between small business marketing and large
business marketing
 Explored the use of the marketing mix in new ventures
 Learnt the unique/modern selling proposition of new firms

MODULE 5: New Opportunities for Expansion

Learning outcome
Upon the completion of this module, you will have

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  Learnt the new technique of E-Commerce, E-business, E-trade
 Discussed in a practical way the application of these techniques in real business
 Explored the challenges to E-commerce, E-business, E-trade, especially in the context of
Nigeria.

MODULE 6: Ethics and Social Responsibility

Learning Outcome
Upon the completion of this module, you will have
 Understood the concept and importance of business ethics
 Learnt about the concept of social responsibility
 Discussed the application of such concepts to the operations and success of ventures.

MODULE 7: Managing Transition: From Start Up to Growth

Learning Outcome
Upon the completion of this module, you will have
 Understood the issue of transition in business
 Learnt about personal discipline that is required to manage a business from start-up to
growth
 Explored issues related to planning, managing business and decision making in transition
situation
 Discussed the stress and pressures, and various resources constraints associated with
transitory stage of business growth

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 MODULE 1
CONCEPT OF BUSINESS AND NEW VALUE CREATION FINANCING

I. Objectives of the module

When you have finished studying this module, you will be able to fulfill the following
objectives:

me factors that motivate people to begin new businesses.

sibility analysis and a business plan

II. Learning outcomes

Upon the completion of this module, you would have
Understood the concept of business planning
-up

-ups

111. Module Content

a. Business planning process
b. Startup decision - what motivates people to begin new businesses
c. Opportunity search and identification
d. Legal issues at start up
e. Feasibility analysis of new ventures and new venture financing

Topic 1: Business Planning Process

A. Introduction/Definition of Concepts
A business is an activity or entity, normally engaged in the provision of products and or services,
for commercial gain, extending to non-commercial organizations that may or may not be profit
oriented. This is irrespective of the size and autonomy. With this definition, non-governmental
organizations, private, public service sector like schools and hospitals are regarded as
'businesses’. Meanwhile, a plan is a statement of calculated intention to organize effort and
resource to achieve an outcome. This may or may not be in written form, but essentially
comprising explanations, justifications and relevant numerical and financial statistical data.
Business can be classified into the following groups but not limited to: a small company; a large
company; a corner shop; a local business; a regional business; a multi-million naira business,
multi-national corporation; a charity organization, a Federal, State or Local Government
Ministry, Agency or Department, an hospital, a joint-venture; a project within a business or
department; a business unit, division, or department within another bigger organization or

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company, a profit centre or cost centre within an organization or venture, an individual or joint
ventures, etc.

Business plan therefore could be referred to as the activities and aims of any entity, individual,
group or organization with the purpose of converting efforts to results. It is a formal statement of
a set of business goals, the reasons why they are believed attainable, and the plan for reaching
those goals. It may also contain background information about the organization or team
attempting to reach those goals. Business plans may also target changes in perception and
branding by the customer, client, taxpayer or larger community. When the existing business is to
assume a major change or when planning a new venture, a 3 to 5 year business plan is required,
since investors will look for their returns within that timeframe. Invariably, the business plan
simply serves as the detailed map of the venture that will guarantee a steady start up, a steady but
gradual growth and vitality of the business.

The process of determining all the goals, strategies and projected actions that you intend taking
to promote and ensure the survival and progress of your business within a given time frame is
referred to as business planning process. This characteristically has two key aspects, one focused
on making profits and the other focused on dealing with risks that might negatively impact the
business. Business plan serves as a blueprint to guide the organization’s policies and strategies
which are continually modified as conditions change and new opportunities or threats appear. If
this is prepared for external audience like lenders and prospective investors; it has to include
details of the past, the present, and a forecasted performance of the business. Typically, this also
contains pro-forma balance sheet, income and cash flow statements to show how the required
fund shall positively affect the financial position of the business.

Topic 2: Theory and Practice

i. Business Planning Process: When writing a business plan from the scratch, from a template
or from the guide of an experienced business plan consultant, there are five required steps to
create a new business plan. It is a detailed process here referred to as business planning process.
These steps are:
i.i. Research: Business planning process starts with a detailed research into the industry, its
customers, competitors, and costs of the business. This research comes in various forms like
information from articles, collected data or direct interviews with prospective clients,
experienced consultants or entrepreneurs. The result of the research should be meticulously
organized and properly documented with its source.
i.ii. Strategize: The second step is to strategize based on the information gathered from the
research. A good major source of strategizing is to watch the current practices in that business
environment to have a foundation to build the necessary competitive distinctiveness. One needs
to ponder over the strategy meticulously to consider the appropriate location, start up finances,
equipment, operations, marketing and legal formalities.
i.iii. Calculate: From the decided strategy activities, comes the third step to calculate. It is
essential to calculate and have a rough draft of the financial implications in terms of the expected
expenditure and revenues to ascertain a possible profitability at the end of the day. There is the
need to bring up all assumptions for startup expenses up to maturity at calculations for running
early operations. Most startup businesses pack up before gestation stage due to financial
assumptions.

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i.iv. Draft: The fourth step of a business planning process is to begin to draft and flesh up the
background work made in the decided strategy and the financial calculations for the actual
business plan detailed content. One may require the services of a business plan writer or
consultant, if there is any challenge in respect of this.
i.v.Revisitation and Proof-reading to finalize: The fifth step is to revisit the entire business
plan details and reconsider any ambiguity or inappropriate wordings and ideas featuring in the
plan. There may be the need to give it further fresh looks after setting it aside for some time.
Soliciting for the assistance of an experienced proof-reader may be necessary to prevent
grammatical, spelling and formatting errors to finalize the plan.

ii. Typical Structure for a Business Plan for a Startup venture

From the foregoing, one will agree that business plans are decision-making tools. There is no
fixed content for a business plan. Rather the content and format of the business plan is
determined by the goals and audience of that enterprise. Some entrepreneurs simply see a
business plan representing all aspects of business planning process that include only the vision
and strategy with sub-plans to cover marketing, finance, operations, human resources as well as a
legal plan when required. To some others, it has to be more detailed than that. It has to typically
include an introduction/overview, a short description of the business idea and opportunity, what
makes it different, who will be involved in the business, how you will provide your product or
service, your marketing and sales strategy and financial situations and forecasts for the expected
profitability. Consequently, it is essential to know that the structure of business plans vary.
However, this discussion uses a typical structure for a business plan for a startup venture.

ii.i. Executive Summary: This is the general overview of the entire business. It is a summary of
the business idea, the mission statement, a sketchy report of where your business fits in the
market place and why it will succeed. Questions that have to be answered here include:
ii.i.a. What is the business? A brief description of the business idea and why it should be a
success, History of the enterprise and its ownership, Information about the entrepreneur’s
qualifications, experience and financial status and location.
ii.i.b. What is the market? A description of the product and what it does, an explanation of ways
in which the product is distinctive and unique, Analysis of the competition, How the product will
be developed and what new products are being considered as replacements, Intangible assets &
protection (e.g. copyright, trade marks)
ii.i.c. What is the potential for the business? Size and expected growth of the market, Analysis of
market by segments, Identification of target segments, Competitors - who they are, ownership,
size, market share, likely response to the challenge, Customers (existing & potential) - who they
are, how they buy, why they buy, Distribution channels
ii.i.d. What are the forecast profit figures? A statement of what the business should achieve over
a given time target (three or five year period)
ii.i.e. What are the Funding requirements?
ii.i.f. What are the prospects for investors and lender?
Please note that all these need not be in details as they are only the overview of the whole plan.
ii.ii. Business Description: This is a detailed description of the business, with an in-depth
explanation of the product or service being planned for the market and its benefits to those who
will buy or use it.

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ii.iii. Business Environment Analysis: This should explain the detailed strategy and tactics to
be employed for bringing the product or service to the market. Strategy is the broad approach to
the achievement of objectives while tactics refer to the details of the strategy. This includes the
business name, the image and how they will be protected.

ii.iv. Market Analysis: This should thoroughly describe the customers, your competitors, the
need for your product or service, and the health and vitality of the market place. This cannot be
guess work. It must be based on a careful and reliable research. Other key questions it must
answer are:

at are the competitive advantages?

ii. v. Marketing Plan: The marketing has to be adequately planned for and must include the:

ii.vi Operations Plan: Operations plan include the production process which must be explicitly
explained. The process of bringing your product or service to the market, office space,
production schedules, inventories, suppliers, supplies, official licenses, and insurance, meeting
and existing business regulations must all be thoroughly discussed. The following may also be
included depending on the type of business.

- potential and effective

ii.vii. Management and Organization: This explains the organizational structure of the
enterprise whether it will be sole proprietorship, partnership, Limited Liability Corporation, or
other status and those to be involved. Other are:

-
financial)

ii.viii.) Financial Plan: This offers the idea about the finances to be involved. The available
amount, the required amount and how and where you will secure the difference. It should also be
able to give the investment appraisal - payback and discounted cash flow as well as break even
analysis. Other expectations from the plan are:
Details of capital required and uses

required, less the finance raised internally from existing owners and from operations
is proposed to raise the finance

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employed, liquidity and solvency analysis
Effective business planning has to begin with an honest and realistic appraisal of the current
position of the business.
iii. Reasons for a Business Plan:
Planning about your business is a necessary process to undertake before, during and after start
up. The business venture could be a fresh proposed start-up, a new one developing within an
existing corporation, a new joint-venture, or any new organizational or business project for as
long as it is purposely to convert action into results. As the backbone of any enterprise, it is very
essential for an entrepreneur to ask him or herself why he needs a business plan. An axiom says
if you fail to plan, then you have planned to fail. A business plan serves as:
iii.i. Road Map/Guide for the Business: It is not everyone that starts a business with a plan but
it is better to have one to guide one. It guides the entrepreneur through the various phases of his
business. Note that it is not a static document that you write once and put away. It should be
simply taken as a guide or checklist of questions that constantly need to be attended to at every
stage of gestation, growth, maturity and decline of the business.
iii.ii. Assurance of potentiality: The headings in a business plan will reassure all that the
venture will work. The plan helps to clarify the entrepreneurs thinking and demonstrates his
commitment to carry on as planned. It also identifies where he/she intends to get to and how to
get there. This will also convince them that the tools, talent and team to make your plan work are
already available.
iii.iii. Define a Business: It helps to identify the business, its objectives/goals and programmes
that must be achieved.
iii.iv. Serves as Résumé for the Business: This happens when there is the need for
communications to attract more investments, loans and profit potentials of the business.
iii.v. Regular Business Review and Course Corrections: The business plan is your regular
reference to ensure you stay focused on its objectives. It will need to be constantly reviewed as
the business develops. It provides the chance to focus one’s mind on how one intends to run the
business and to identify early on any areas or issues that might have been forgotten or neglected.
iii.vi. Review Current Progress Against The Initial Forecast: The progress of the business
shall easily be feasible against the earlier forecasts. This makes any review or necessary
adjustments to get it back on track possible. Having a clearly presented business plan document
will also make it easier for any specialist support needed.
iii.vii. Support For A Loan Application Or Raise Equity Funding: Whenever a business is
seeking fund from a bankers, venture capitalist or investor, a comprehensive business plan that is
clear, focused, realistic and contains sound business reasoning shall be a necessary requirement
to show that it is worthy of financial support. Banks are more favorably disposed to applications
with a business plan whenever it is approached for capital to expand.
iii.viii. Defines Agreements Between Partners: It helps to define agreements, shares, etc
between partners, shareholders and other stakeholders in the business.
iii.ix. Proper Allocation of Resources: It helps to allocate resources properly, handle
unforeseen complications and thereby assist in making adequate business decisions.
iii.x. Sets a Value on a Business For Sale or Other Legal Purposes: Whenever the business is
placed on sale, it helps to set a value for it. This is also required at most times for legal purposes.

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WORKSHEET A: Typical Structure For A Business Plan.
Parents and some of the students are involved in one business venture or the other. These
ventures need to be developed. Use the worksheet below, to provide information that could be in
a business plan that will improve the business.
Students Names:_______________________________________________________
Matriculation Number:___________________________________________________
Faculty/Department:____________________________________________________
Name of the Business
venture______________
_____________________
_________
CURRENT STATUS DEVELOPMENT
PLAN
CONTENT
1. Executive Summary
2. Business Description
3. Business Environment Analysis
4. Market Analysis
5. Marketing Plan
6 Operations Plan
7. Management & Organization
8.. Financial Plan:
9. Conclusion

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 MODULE 2
ISSUES OF BUSINESS GROWTH: AN OVERVIEW

Learning outcome
Upon the completion of this module, students would have:

Content
a. Concepts and reasons of growth
b. Strategies for growth
c. Challenges of growth
d. Success factors for growth

Activities
In at least 4 hours the following should be accomplished:
a) Classroom presentation and discussions
b) Challenge Students to use local case studies to explain nature of business growth
c) Engage students in group discussions on ways to overcome challenges of growth
d) Test students understanding on relationship between businesses growth and socio-economic
conditions in society.
e) Assess students appetite to grow organizations or potential ventures

Introduction
Entrepreneurship is recognized as the engine of economic growth and poverty reduction
worldwide. This is because the social and economic value added through innovation and
employment generation is critical to the increase in the overall productiveness of the economy.
The more the enterprises produce the more inputs in the form of raw materials, labour and other
supplies are required. Thus, it is essential for businesses to grow in order to serve the interest of
the owners and also contribute positively to the economic development of regions and nations
(Acs, 2006 and Autio, 2007). Thus, managers and owners are expected to design and implement
effective strategies to ensure the survival and growth of businesses. Ironically, governments in
many developing countries, including Nigeria, have not done well in providing enabling
environments for businesses to flourish. However, the ultimate responsibility for growing
businesses rest on the shoulders of owners/managers. This module is designed to equip potential
entrepreneurs with the tools and framework to assist them in their journey towards creating
viable and expanding ventures.

Topic 1: Concept of Business Growth

Business growth means expanding firm’s products and services or expanding its target markets,
or some combination of each. Any increase in the volume of activities of enterprises is a clear
indication of growth. Businesses grow for a number of reasons including to take advantage of a
gap in the market, to gain a competitive advantage over rivals, and to win increased market

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share. Usually ventures start small because of limited knowledge of the market, shortage of
capital and lack of skilled employees etc. It is expected that as the entrepreneur gains more skills,
knowledge and acquire additional resources, the volume of activities of the business will expand.
An entrepreneur may also capitalize on changes in the environment to expand his operations in
order to exploit new opportunities.
Theorists have shown that behavioral traits are significant influence to entrepreneurs desire to
grow his business. Some people inherently derive satisfaction from being excellent in what they
do; they tend to have insatiable desire to grow and positively affect the world around them. Other
people tend to be comfortable with average results while others are “easy come easy go”. In
explaining the pattern of business growth, many theories rely on “The life-cycle approach. This
approach posits that just as humans pass through stages of physiological and psychological
development from infancy to adulthood, businesses also evolve in predictable ways and
encounter similar problems in their growth” (Bhidé, 2000). It is proposed that businesses pass
though infancy, growth, maturity and then decline or even close shop. Some scholars suggest
more or fewer stages of development. However, there is no consensus on the number of stages,
nor on how they are related. Moreover, the proposition that all businesses follow the set
sequence is not at all supported by the empirical evidence. The main issue is that companies are
started at one point and they need to be nurtured and managed to grow bigger and bigger. There
are companies around the world that survive decades or centuries. The question is why do some
businesses survive and grow while others do not?

Reason for Business growth

Researchers have shown that more than half of all businesses fail in less than two years of
commencement. Also, a large number of those businesses that survive the first two years hardly
grow. It is only few businesses that survive, grow, regenerate and even create other businesses.
Conventionally, people ascribe businesses success or failures to fate/chance or certain
environmental conditions including family background. Even though one could not entirely rule
out the influence of changes in the environmental factors, the entrepreneur's positive attitude,
discipline, skills, competences, resilience and experience are real factors determining the
transition of an enterprise from start up to a fully grown or diversifies venture.
The question often asked is what motivates people commit to starting and growing their
businesses. Usually, entrepreneurs tend to make critical investments, take acceptable risks and
learn consistently because of their desire to make money and enjoy all the rights and privileges
that come along with wealth. Other reasons include improved social status and well being,
greater opportunity for philanthropy and community services, and gaining control over their own
destiny. Employees attribute increase in income/ benefits and advancement with businesses that
grow. Government tends to favor business growth because it lessens unemployment and social
tension in addition to raising more revenue from taxes. Thus, it is in the best interest of business
owners and other stakeholders in the society for businesses to grow and flourish because growth
tends to create social and economic value for all.

On general note, start ups and small businesses generate employments opportunities. ILO (2007)
estimated that about 70% of the people in Sub-Saharan Africa rely on small and informal
establishment for their livelihood. For example in South Africa, the share of employment
provided by SMEs sector is estimated at 60% and generated about 40% output (Lukacs, 2005).
In Botswana, small business contributed between 30–45% to the nations GDP and accounted for

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more than 60% of wage employment. Thus, any increase in the activities of small enterprises
will lead to corresponding increase in employment. As employments are generated, the increase
productivity raises the level of wealth creation in a given economic environment. This is why the
productiveness of an economy is related to increasing income and improving standards of living.
Businesses combine human and material resources to create value. So, as activities of enterprises
increase due to increase in labour productivity and efficient use of resources, all things being
equal lead to high wages for individual worker, more profit for the company and rise in GDP for
the nation. When productivity is higher, cost of production tends to be lower. With lower cost of
production, citizens obtain products cheaper and these, in turn, increase living standards.

Types of Business Growth

There are two main types of business growth:
1. Internal Growth and 2. External Growth
1. Internal growth: Internal growth is typically a steady process of expansion from within the
firm. The owner(s) of the business contribute more capital, or plough back profits into the
business to acquire new assets, employ more staff, build additional plant or deploy new
technology. The main advantage of this approach is that the business is able to leverage its assets
and experience over time. The main disadvantage is that it takes time, and rivals may be
expanding and gaining competitive advantage as well. NASCO Nigeria plc used this approach by
expanding into the production of detergents and carpets. Thus, through hard work and careful
planning owners can grow their businesses successfully.
2. External Growth: External growth can be carried out by seeking external finance, or by
merger and acquisition. These approaches tend to rely on bringing external resources into the
business in order to fund expansion. In this case, there is the possibility of changes in the
ownership structure of the firm or changes in its gearing position. See topic 2 for more details on
mergers and acquisition.

Topic 2: Strategies for Growth

Business organizations must grow in order to remain relevant and competitive. A firm is required
to constantly search for and make use of knowledge of its changing market in order to identify
and exploit growth opportunities. Businesses tend to grow in order to deliver their products or
services better than competitors. But, the capacity of the firm to deliver resides in the range and
quality products or services offered to the customers, the skills and the service offered by the
staff, technical knowledge/ technology and customer/supplier relationships.

Therefore, entrepreneurs are expected to create an environment that will fit the growth agenda of
the firm. This entails continues assessment of structures, policies, procedures, systems, activities,
decisions making, coordination, and communication networks. All of these factors are vital to
achieving optimum growth. When a firm is better organized, there are a number of alternative
path for growth. They include:
1. Expanding Product Line or Service Offerings: A firm may increase its products offerings
by serving the existing market or discovering an entirely new market. This requires market
research and intelligence to enable the firm gauge the acceptability of the new products to the
target market. For example, Dangote Group of companies’ plc introduced Dangote noodles to its
product lines to serve the existing large market for fast meals in Africa.

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2. Opening new branches/division: In order to expand to new market, entrepreneurs make
efforts to set up branches in other locations. Opening new branches or divisions allows firms to
expand to new locations, other local governments or states with new or existing products
depending on market requirements. The key to creating and successfully operating in a new
location is to ensure that a demand already exists or the company is capable of stimulating
demand in the new target market.
3. Exporting: Many firms tend to remain domestic throughout their existence. Today, markets,
customer taste, competition and knowledge are global. Regardless of the business one undertakes
there are numerous opportunities for growth in the international market. Besides, exporting to
other nations enables a company to have a unique competence (Porter, 1990). This is because,
unlike broadening domestically, expanding globally is likely to leverage and re-enforce a
company’s unique position and identity. Lee Group of companies in Kano State exports rubber
shoes to the United States. The volume of sales/profit generated by the company placed it as one
of biggest and most successful manufacturing concerns in Northern Nigeria.
4. Innovation: Innovation is the greatest source of sustained growth. Peters and Waterman
(1994) observed that innovative companies are skillful at continually responding to changes in
customers’ needs and are better prepared to overcome new competitive or other environmental
challenges. Innovation signifies continuous change in the way a firm serves its customers or
conducts its business. This suggests that without constant flows of ideas that reinvent work
process, a business is condemned to obsolescence (Hamel and Valinkangas, 2003). Innovation
can be bolstered when people are considered as assets, (not simply cost of production) and are
given opportunities and reward for bringing good ideas (Fafawora, 1998). It is true that a number
of businesses in Africa are informal or family operated. To be successful, there is the need for a
shift towards modernization and employing global good practices for managing ventures.
Sticking to traditional methods of operations whether in farms, shops or factories no longer
work. Entrepreneurs are required to drive change process that will create unique value by tapping
into the creative talents of members of the organization. Mobile phone companies such as Nokia
and Sony Ericson continually alter and improve their product features to create new value
thereby retaining existing customers and attracting new customers worldwide.

5. Creating and Maintaining Online Presence: Today’s world is divided not by ideology but
by technology. When a firm employs modern information and communication technology it
gains an edge over its competitors (Marco and Levien, 2004; Mitra, 2012). Instead of a firm
setting up branches physically within and outside national borders, it can reach global market
using internet. To be successful, a firm is expected to create and promote a website that is user
friendly. Today, universities around the world conduct their businesses online by advertising
programmes, admitting and registering students and receiving tuitions. In fact, some universities
run online degree programmes to thousands of people annually. Also, there are businesses such
as Amazon.com and e-bay that reach millions of people across the world mainly by using
internet.
6. Franchising and Licensing: Franchising and licensing are used by companies that have
successful products or services in order to expand to other markets more efficiently. Franchising
is a growth strategy where a firm allows another firm or firms to use its successful business
model. When a business reaches certain level of maturity, it can franchise its product offerings.
In this case, a firm enters into a contractual relationship with other firms known as franchisees to
conduct business under the franchisor's trade name for a fee. United States has some of the most

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popular franchises in the world. They include McDonalds, Subway and 7-Eleven among others.
Licensing however, is a contractual arrangement where a firm known as a licensor allows
another firm called licensee to use its brand name, patent, or other proprietary right, in exchange
for a fee or royalty. License agreement provides both firms to expand and drive mutual benefits.
The licensor benefits from the knowledge, technology, skills, assets and other competencies of
the licensee. It also allows the Licensor to enter foreign markets by using local firms. This
arrangement is popularly used by manufacturing firms such as pharmaceutical companies,
clothing, toys, technology based firms etc.

7. Merger and Acquisition: Formally the term “merger” applies to the consolidation of two or
more companies about equal in size. Acquisition involves a larger firm taking over smaller ones.
The two terms are however used interchangeably. Companies merge with or buy other
companies to expand or consolidate their operations. In many cases companies engaged in
merger or acquisition in order to get access to real estate or other facilities; to get access to
brand, trademarks, patents or technology and sometimes to get competent employees. But the
most common reason is to acquire customers (Selden and Colvin, 2003). In advanced nations
growth by merger and acquisition date as far back as 1889. In the 1990s, the tendency for
companies to use merger and acquisition as a diversification strategy has even been more
pronounced. The business could expand to other markets or produce more products by merging
with one or more firms that produces similar or different products. In Nigeria, merger/acquisition
is used to better use resources and achieve greater adaptability to changing economic
environment. The consolidation in the Nigerian banking sector where some banks merged and
others got acquired enabled banks to grow in size rather than operating independently. This has
allowed the banks to respond to both local and international competitive challenges. Unity Bank
Plc is created out of the merger of nine banks and recently Oceanic Bank plc acquired
intercontinental Bank plc.
8. Competition: In the global corporate scene, companies cannot afford to ignore the need to
collaborate with other companies or competitors to create new value. This is not to undermine
competition, but to allow firms to compete at one level and collaborate in another level with the
aim of taking advantage of new market, or developing new products which they could otherwise
not achieve independently. Also, firms collaborate to take advantage of foreign markets. This
explains why about 50% of North American based corporations use collaborations to gain access
to new markets (Casseras, 1997). This form of alliance facilitates learning, access to modern
technological advances and reduced transition time. The computer and photographic film
industry are good examples of how an active alliance could help companies add superior value.
The IBM’s personal computer business relies on partnership with other companies such as
Microsoft, Intel and recently Apple Computers (Casseras, 1997). IBM has more than 100
alliances worldwide. Again, the joint venture (Fuji Xerox) between Xerox, a photocopy machine
company and Fuji, a camera film company, resulted in the creation of photographic film
company second only to Kodak.

Topic 3: Challenges of Business Growth in Nigeria

It is well understood that Small Scale Enterprises (SMEs) are the most effective means of
generating employment and fostering growth. Typically, SMEs adapt with greater ease under
changing business conditions because of flexibility and low capital involved. In spite of their
resilience, small businesses encounter numerous challenges which limit their ability to grow.

14
These challenges are not only peculiar to start ups but also limit the capacity of medium and
large enterprises. It is pertinent to recognize that, like many African countries, Nigeria’s
economy is mono-cultural, relying overwhelmingly on oil resources. Oil and gas contributed
about 99 percent of exports and provides about 85 percent of government revenues (World
Bank/DFID, 2006). Over the years, the country has failed to diversify its economy away from the
extractive sectors which increasingly limits its ability to grow and develop. This problem further
prevented Nigerian entrepreneurs from moving towards higher productivity in value added
sectors. Hausman and Rodrick (2005) posit that poor countries tend to rely on low-income goods
even though when they overcome certain externalities, they can successively move to higher
value goods. The years of inaction in this regard resulted in the low productivity and non-
competitiveness of Nigerian industries. Interestingly, Nigerian people have demonstrated that
even without government support and direction, they are capable of staring and growing
ventures. This resilience of Nigerians can be found in the following trades:

Other business activities that experienced significant growth in the last few years include:

The problems of many of ventures listed above remains lack of expansion, low technology and
skills; and limited capital. In fact, significant numbers of youth that have low skills are either
unemployed or are engaged in street hawking and road side petty trades because the ventures that
are expected to absorb them do not frequently grow. Thus, there is the need to carefully address
the binding constraints to growth of businesses in order to regenerate the economy. Some of the
key challenges are as follows:
1. Lack of coherent economic empowerment policy: There is yet to be a comprehensive long
term agenda for youth development which would draw momentum from reliable data bank for
skilled and unskilled; employed and unemployed youth in the country. There is almost total
absence of coordination among various agencies concern with employment generation in the
country.
2. Technical constraints: Although there are few vocational and other skills acquisition centers
in the country, their number and competencies are inadequate to improve the technical capacity
of many Nigerians. Also, the technical skills provided are skewed towards low technology and
low skill trades.
3. Deteriorating economic condition: Due to weak economic policies that engender high
inflation, high interest and exchange rates couple with the smuggling of foreign cheap products
into the country, many people consider it extremely risky to invest in agri-business and
manufacturing.
4. Lack of productive culture: People are accustomed to being dependent on parents, relative,
friends and government. Without social re-orientation, it will be difficult to free the enormous
talent and energies of people to think and act their way to financial independence.

15
5. Weak Investment climate and Doing Business Indicators:
- Low Access to finance: Even with the introduction of Micro Finance Banks and the
consolidation of the banking sector, a large number of businesses in Nigeria do not have access
to finance.
- Access to Business Development Services: Entrepreneurs require services such as tax
planning and accounting, business plans, advice on marketing, production, IT systems, legal
services etc. However, due to lack of access to finance and technical skills, many do not
appreciate the relevance of the services and some cannot afford the services. Hence, they remain
small.
- Low Access to infrastructure: Nigerian businesses grapple with inadequate power, water,
sanitation, security, rails and roads networks. This tends to increase the cost of doing business
which drains resources required for expansion.
- Low Access to Investments: many companies that operate outside the extractive sectors find it
difficult to attract foreign investment and foreign lending. The Federal Ministry of Commerce
and Nigerian Investment Promotion Council have a unique role to play in this regard.

Even though the list of challenges is not exhaustive, it is pertinent to begin to consciously foster
an environment that encourages entrepreneurs to invest in new technology and new activities
which is critical to the economic growth of the country.

Topic 4: Critical Success Factors for Growing Businesses

In an effort to create enduring and growing ventures, entrepreneurs require the following if they
are to succeed.
1. Clarity: An entrepreneur is required to be clear of her vision in life. This will help her to set
challenging goals for the business. The starting point is to begin with personal values; what do
one believes in and stands for. The greater clarity an entrepreneur has regarding values, vision,
mission, purpose and goals, the greater the probability that her venture will grow and succeed.
2. Competence: Even when goals are clearly defined, there is the need for an entrepreneur to
constantly learn new skills and acquire experiences to permit making informed decisions. Formal
and informal trainings are available locally and internationally to equip business owners and
managers with special skills needed to create unique value to the society.
3. Reputation. The most valuable asset a firm can develop is its reputation. Reputation is how
the business is known by its customers. Building reputation around quality, reliability, and
service is critical to the survival and growth of businesses.
4. Resilience: There are numerous challenges confronting businesses especially at the initial
stage. The ability to identify and remove obstacles with focus and speed is critical.
5. Creativity: Successful businesses are innovative. The ability to think differently, faster and to
figure out new and easier ways to produce and deliver products and services are very crucial to
growth.
6. Concentration: Entrepreneur’s ability to avoid distractions and focus on what she does best is
one of secret for success. Many people spend so much time copying others and jumping from
one business to the next. They are unable to focus their energy, resources and time to what they
are good at. Bill Gate can expand to automobiles and pharmaceuticals, but he chooses to
concentrate his attention to software and related businesses where he possessed special talent and
advantages.

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6. Courage: Many people tend to avoid risks and difficult endeavors. Many studies have shown
that the courage to take the "first step” makes all the difference. This entails audacity to explore
and venture into the unknown with no guarantee of success.
7. Learning from failure and moving on: As entrepreneurs target growth they sometimes fail.
The ability to learn from the failure and venture out on the next exhibition makes entrepreneurs
different from the “rest of the pack”.
8. Financial Discipline: There are instances where entrepreneurs get carried away by short term
financial successes. They tend to acquire assets and liabilities that contribute little or nothing to
the business. In some cultures, they acquire more wives and invest massively in luxury items in
an attempt to change their social outlook. This is one of common reasons why businesses
stagnate and die eventually.
9. Investment in people: Businesses that grow consistently develop the capacity of managers
and employees. Also, they tend to appreciate and reward the creative talents and efforts of their
employees.

References
Acs, Z. (2006). How is entrepreneurship good for economic growth? Innovations, 1, 97-107
Autio, E. (2007). GEM 2007 report on high-growth entrepreneurship. London: Global
Entrepreneurship Research Association.
Bhidé, A. (2000). The origin and evolution of new businesses. New York: Oxford University
Press.
Casseras, B.G (1997). The Alliance Revolution.Harvard Business Press, Massachusetts, USA.
Fafawora, O.O. (1998), Management Implementation of Globalization, Management in
Nigeria, 34(2 – 4): 5 – 9.
Hamel, G. and Vlikangas, L. (2003).The Quest for Resilience, Harvard Business Review, Sept.,
PP.52-63.
Hausmann, R. &Rodrik, D. (2005).What a Country Exports Matter, a CID Working Paper,
No.123, Harvard University.
Mitra, J. (2002). Entrepreneurship and Innovation, Rutledge, United Kingdom
Peters, T., Waterman, R.H. (1995).In Search of Excellence: Lesson from America’s Best Run
Companies, London: Harper Collins publishers.
Porter, M. E. (1990), The Competitive Advantage of Nations, Harvard Business Review, March
– April: 135 – 169. 19
Selden, L., Colvin, G. (2003). M&A needn’t be a Loser’s game, Harvard Business Review,
June, pp.71-79.
World Bank/DFID, (2006). Nigeria Competitiveness and Growth, Poverty Reduction and
Economic Management 3, Country Department 12, Africa Region, Report No. 36483 – NG
Websites
freshthinkingbusiness.com
http://businesscasestudies.co.uk
www.six sigmaonline.org aveta business institute, 2010

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 MODULE 3
SOURCES OF FUNDS

Learning outcome
Upon the completion of this module, students will have:

dium
enterprises in Nigeria.

Content
1. Sources of funds for new and entrepreneurial ventures
2. Internal and external sources of funds; formal and informal sources of funds and their
importance to new ventures
3. Concept, method, and types of finances provided by venture capital
4. Government initiatives in funding new ventures and Small and Medium Enterprises (SMEs) in
Nigeria.

RATIONALE
Finance has long been considered by Small and Medium Enterprises (SMEs) operators as an
important issue. Obtaining financial resources assistance in the amount required and when they
are needed can be more difficult for small scale entrepreneurial ventures than for established
organizations. The critical issue is to ensure that sufficient cash is available for current
operations and growth of the business. The owner must also ensure that money is available to
settle current liabilities when due; these may include inventory, rent, telephone bills, office
supplies etc. Other reasons for sourcing business finance include the following:
i. upgrading facilities to comply with stricter environmental regulations
ii. financing production in cases where there is significant lag between when costs are incurred
and when payments are received;
iii. purchasing of new equipment or facilities;
iv. purchasing of business vehicles; and
v. building up inventory in advance of a busy season.

Irrespective of the reason(s) for which funds are required, it is the sole responsibility of the
business owner to ensure that funding is obtained at the right time, at the right cost and from the
right source. Before raising the required funds, the business owner must estimate the actual funds
needed in order to avoid encountering unnecessary high cost of capital or excess capital. The US
Small Business Administration advices business owners to address the following questions when
taking decisions on their need for funds:
(i) Why do I need the fund?
(ii) How much do I need?
(iii) When do I need it?
(iv) How long will I need it?
(v) Where can I obtain it?
(vi) How can I repay it?

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Providing answers to these questions will help him or her to ensure that the needed fund is
obtained from the right source and well utilized. This means that there are several sources of
funds available to the small business owners.

ACTIVITIES
1. Explain to students the different sources of funds for new and entrepreneurial ventures which
include:
(i) Equity sources of funds
(ii) Short-term sources of funds
(iii) Medium-term sources of funds
(iv) Long-term sources of funds

2. Have students read Handout 2 and discuss the following questions:

(i) What are the differences between internal and external sources of funds?
(ii) What are the differences between formal and informal sources of funds?
(iii) What is the importance of internal and external sources of funds to new ventures?
(iv) What are the advantages and disadvantages of internal and external financing?

3. Have students read Handout 3 and discuss the following:

(i) What is the concept of venture capital?
(ii) What are the financing stages in venture capital?
(iii) What are the different types of venture capital?
(v) What are the businesses that are attractive to venture capitalists?
(vi) What are the sources of financing in venture capital?
(vii) What are the methods of valuation in venture capital?

4. Have students read Handout 4 and discuss the following questions:

(i) The Small and Medium Industries Equity Investment Scheme (SMIEIS)
(ii) Nigerian Agricultural, Cooperative and Rural Development Bank (NACRDB)
(iii) The Bank of Industry (BOI)
(v) Refinancing and Rediscounting Facility
(vi Small Scale Industries Credit Scheme (SSICS)
(vi) World Bank Facility for Small and Medium Scale Enterprises Loan (SMEX Loan)
(vii) Nigerian Export and Import Bank (NEXIM)

5. Have students read Handout 5 and discuss the Case Study at the end of this module.

SOURCES OF FUNDS FOR NEW AND ENTREPRENEURIAL VENTURES

There are several sources of finance for both new and old entrepreneurial ventures. These
sources are: (i) Personal Savings (ii) Borrowing from Friends and Relations (iii) Trade Credit
(iv) Accrual Accounts (v) Retained Earnings (vi) Equity Financing (vii) Bank Loans
(viii) Project Financing (ix) Venture Capital (x) Debt Financing (xi) Commercial Draft
(xii) Banker’s Acceptance (xiii) Bills Discounting (xiv) Commercial Paper
(xv) Inventory Financing (xvi) Bank Overdraft (xvii) Loans from Corporative Societies
(xviii) Hire Purchase (xix) Leasing (xx) Factoring (xxi) Microfinance Bank

19
(xxii) Public Offerings (xxiii) Small Business Investment Organizations

(i) Personal Savings: Personal savings is the most common source of financing for small
business enterprises. It has to do with the personal money which the entrepreneur has been able
to set aside for an intended business venture. This includes cash and any personal assets
convertible into cash or to business use, for example, cash from family/friends which is an
informal form of financing falls into this category. This may also be from past savings, trust
accounts or some other form of personal equity of the business owner. This is the least expensive
method of financing and also the easiest as the decision to lend is made by the same persons
wishing to borrow the fund.
(ii) Borrowing from Friends and Relations: Funds can be raised for entrepreneurial ventures
through borrowing from friends and relations. The amount to be raised through this source
however, depends on the financial capabilities of the friends and relations and the relationship
that exists between the business owner and his friends or relations. The repayment period and the
interest payable are a function of the terms of borrowing which are usually determined by the
lender.

(iii) Trade Credit: Trade credit as a source of fund occurs when a buyer makes an arrangement
with the seller to buy goods on credit and pay later. However, this arrangement depends on the
customer’s good reputation and it often requires a pre-arrangement between the buyer and the
seller. Trade credit is one of the most widely used short term sources of funds and the term
normally falls within the range of thirty to ninety days which can still be extended after the
expiration period, depending on the relationship between the parties involved.

(iv) Accrual Accounts: Accrual accounts can also be called account payable. It represents the
continually occurring current liability of a particular business. These include wages, interest,
taxes and other expenses that are payable in arrears. They are due but yet to be paid. Their
repayment period is usually within a period of one year.

(v) Retained Earnings: Funds can also be obtained through undistributed profits. A business
owner may decide to reinvest part of his or her profit back to business for efficient operations of
the business. This is also called plough-back profit and it shows the naira value of ownership
rights that result from the business retention of its past income. In business, retained earnings are
usually considered as an additional fund for financing the future growth of the business. Retained
earnings are helpful as a last resort in business finance. The inability of the business owners in
meeting up with the stringent conditions of the financial institutions usually makes the business
owner come to fall back to their business reserves for funds raising.

(vi) Equity Financing: Equity finance is a form of business finance in which funds borrowed to
operate a business venture are not taken as loan but converted to equity (stake in ownership)
which now makes the lender a part owner of the business venture, risk and profit are shared
together. The amount of equity finance in a particular business may be substantial subject to
factors such as the nature of the business, the total amount of capital required and the interest of
the investor. The advantage of equity financing is that its infusion of capital does not have to be
repaid like a loan.

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(vii) Bank Loan: A small business entrepreneur can approach bank for a loan. This is a common
practice among established small business enterprises with good reputation doing business with a
particular bank. Banks usually charge their borrowers a prime rate and an additional charge
usually called handling charge. The actual interest rate charged depends on the creditworthiness
of the customers. Banks usually charge a higher interest rate to borrowers whom they perceive as
having a higher risk of default. The bank interest rate also depends on the type of loan involved
whether is fixed or variable. If the loan is fixed rate loan, the interest rate will be the same for the
amount of money over the number of years involved. But if the loan is variable rate loan, the
interest payable will vary periodically over the terms of the loan subject to the fluctuation of the
market interest rates.
Bank loan can be given either on short term or long term basis. Short term bank loan usually
covers between one month and less than one year, while long term bank loan covers a period that
is more than year one. Short term loans are used to replenish the working capital account, such as
purchase of inventory, supply of consumables in an organization, finance of credit sales or taking
of advantage of cash/bulk discounts etc. This is repaid after converting inventory or receivables
into cash. The relationship of the borrower with the bank matters a lot. The reason for this is that
banks are more likely to give loans to business owners they know very well and whom they have
their business and personal records. The amount of money that banks are willing to give per time
depends on the nature of business, the size of business, the repayment period and the
creditworthiness of the business owner.

(viii) Project Financing: Project financing is the funding of a particular project by a financial
institution. This can be a source of funds only when the proceeds from the project are sufficient
to repay the capital sum usually known as the principal which is the amount of money borrowed
for the execution of the project with interest accrued. The project will be used as the security for
such loan and the advance is self–liquidating. In this case, the borrower‘s financial standing or
position is less important because the institution must ascertain the value of the project and
ensure that the value is high enough to settle the amount of money borrowed by the contractor.

(ix) Venture Capital: Venture capital is the money invested by individuals or venture capital
firms in small and high –risk business enterprises. Venture capitalists are investors that invest in
other people’s businesses for the sole aim of profit. They receive equity participation i.e. the
equity ownership right of some proportion in the business enterprises they have invested their
money in. They participate substantially in the management of the enterprises in which they have
invested, holding board positions and working in close liaison with the enterprise’s management
team. The venture capital industry may consist of:
(a) wealthy individuals (b) foreign investors (c) private investment funds
(d) pension funds or (e) major corporations.

(x) Debt Financing: These are funds that the business owner borrows and must repay with
interest. Borrowed capital maintains ownership of the business (unlike equity financing, which
dilutes ownership) but is carried as a liability on Balance Sheet. In general, small businesses are
required to pay more interest than large businesses because of perceived higher risks, that is, few
percent above prime rate. Entrepreneurs seeking debt capital can have access to a range of credit
options varying in Complexity, availability and flexibility, both from commercial and
government sponsored lenders.

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(xi) Commercial Draft: Commercial draft is a short term financing source credit. It is an
unconditional order in writing made by one party. The drawer addressed to a second party, the
drawee ordering the drawee to pay a specified sum of money to a third party called the payee.
Commercial draft may be a sight or time draft. The type depends on the negotiation terms.

(xii) Banker’s Acceptance: This is credit facility that involves a bank and its customer. It is a
time draft payable at a stipulated date. It is an arrangement between the businessmen who
produce goods for sale. The businessman customer then draws the acceptance credit paper
requiring his banker to accept the responsibility of settling the bills pending when the goods will
be sold. By placing its acceptance on the bill (acceptance credit) the bank has accepted a
contingent liability as well as giving an indication that it will honour the bill upon presentation at
maturity in case the customer defaults. A discount house usually evaluates the creditworthiness
and reputation of the accepting bank. The maturity date is usually less than six months and it is
mainly used in international trade.

(xii) Bills Discounting: Bills discounting is a source of finance where the supplier of goods
(creditor) writes a bill of exchange for the customer for acceptance. Immediate cash may be
obtained by the supplier for his goods after the goods have been dispatched to the customer by
discounting the bill with the bank or discount house after the bill has been accepted by the debtor
(customer). Other aspects of bill discounting involves Government securities such as Treasury
Bills and certificates which can be surrendered before their maturity dates to banks or discount
houses for purchase. The amount paid to the bill owner is less than face value.
(xiii) Commercial Paper: This is an instrument of the money market (commercial Bank) that is
usually used by many organisations to raise short- term funds. Under this source of funds, an
issuing house issues it on behalf of a company. The issuing house only finds investors to buy the
commercial paper, the investors deal directly with the company issuing the note. The issuing
house does not even guarantee the note. The issuing house charges commission for the service
through a coupon rate which is usually stated on the commercial paper. The maturity date of a
commercial paper ranges between 90 and 180 days and it is usually written out to contain details
such as the date of issue, the maturity date, the amount per coupon, etc. The coupon rate and the
issuing house commission make up the cost of commercial paper.

(xiv) Bank Overdraft: Another financial facility is an overdraft facility, which banks give to its
business clients. Bank overdraft is an overdrawn bank current account and a short-term financial
facility which is renegotiated every year depending on the performance of the business. It may be
secured or unsecured depending on the amount of money involved. Bank overdraft is usually
covered by personal guarantee of SME owners and carries a higher interest rate than a normal
loan. Often this interest rate is higher than profit margin percentages, which makes it a very
short-term loan for covering cash flow problems rather than to finance acquisitions or buy
stocks. Before banks grant overdraft, the following factors are considered:
(i) The purpose for which the fund is required;
(ii) The character of the entrepreneur;
(iii) The management and financial position of the business;
(iv) The capacity of the business and
(v) Collateral security (this depends on the amount of money involved).

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(xv) Inventory Financing: Inventory financing is the use of inventory or stocks as collateral
security for borrowing of fund. The stocks are usually placed under the control of the lender
pending when the loan will be repaid. Note that not all stocks are qualified for such transaction.
The marketability, durability and the price stability of the stocks must be considered before such
stocks will be used for inventory financing.

(xvi) Borrowing from Cooperative Societies: A cooperative society is an association

established by group of individuals who pooled their resources together to engage in a business
transaction for profit making but mainly for the benefit of members. Depending on the financial
capability of the cooperative society, it can provide funds for its members to start business or
finance their business transactions. The amount that can be raised from cooperative society is
subject to the financial commitment of the members. The repayment period is not usually beyond
two years since the fund is provided on short-term sources of finance. The interest charged is
also considerable low compared with commercial bank interest rates.

(xvii) Hire Purchase: Hire purchase is used when purchasing assets such as plant, equipment,
machinery and vehicles. An initial deposit may be required followed by a series of installment
payment with an attached interest. The interest rate is usually controlled by the prevailing bank
rate (e.g. 4 percent above bank lending rate when regulated by government). Under hire
purchase, agreement periods can range between 1 to 3 years depending on life span of the asset.
Hire purchase is quick and easy to arrange, the security for agreement being the asset itself.
Upon the payment of the initial deposit, the customer enjoys immediate use of the asset. The
asset legally belongs to the owner of the asset and if the buyer defaults, the owner of the assets
automatically repossesses his or her asset.

(xviii) Leasing: A lease is an agreement whereby the owner-manager (lessee) undertakes to

make regular monthly payments to the financial institution (lessor) in return for the use of
equipment belonging legally to the latter. The leasing instrument is used by SMEs to finance
equipment (including vehicles) acquisitions. Operating leases function in such a way that the
leasing company retains ownership and risks associated with the equipment (although insurance
is mandatory). The lessor is therefore both the financier and the legal owner of the equipment.
When the tenure of the lease ends, the lessee can decide to elect to purchase the equipment for a
sum which must represent at 10% of the cost of the equipment. In lease financing, the following
points are important and worth noting by any entrepreneur that wants to enter into lease
agreement.
(i) Ownership of the asset does not rest with the business until the asset is sold at residual value
at end of contract.
(ii) Capital allowances may be claimed by leasing institution but not by the business.
(iii) Lease payments are tax deductible that is, passed as expenses in Profit and Loss.
(iv) Leasing does not normally affect borrowing capacity unless financial legislation requires
balance sheets to reflect leasing finance.
(v) Period of repayment matches expected life of asset.
(vi) Immediate use of asset.

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(xix) Factoring: Factoring is a financing source that allows a business owner to raise fund based
on the value of his or her invoices yet to be paid. Under factoring arrangement, an entrepreneur
can outsource their sales ledger operations and maximize the use of sophisticated credit rating
systems for their funding. Factoring arrangement can be with or without recourse. It is with
recourse if the factor company collects the amount due from other means upon the default of the
debtor and without recourse, if the factor company bears the consequence upon default of the
debtor.
In factoring arrangements, an agreed proportion of the invoice value (about 80%) will be paid
within a pre-arranged time of say 24 hours. In return, the factor issues receipt on behalf the
organization upon collection of the payments. One of the advantages of factoring is that the
business owner will receive the majority of the cash from debtors within 24 hours rather than a
longer time. It also reduces the time and money an organization can spend on debt collection
since the factor will usually run your sales ledger for the organization. On the other hand,
factoring may impose constraints on the way business is being conducted thereby discouraging
the customer for future business transactions with the customers.

(xx) Microfinance Banks: Microfinance bank was established in 2005 by the Central Bank of
Nigeria according to the provisions of Section 28, sub-section (1) (b) of the CBN Act 24 of
1991(as amended) and in pursuance of the provisions of Sections 56-60(a) of the Banks and
other Financial Institutions Act (BOFIA) 25 of 1991. This was mainly to promote monetary
stability and a sound financial system in the country. The establishment of microfinance banks is
meant to expand the financial infrastructure of the country so as to meet the financial
requirements of the Micro, Small and Medium Enterprises (MSMEs). Three features distinguish
microfinance from other formal financial products. These are: (i) the smallness of loans
advanced and or savings collected, (ii) the absence of asset-based collateral, and (iii) simplicity
of operations.

The goals of microfinance banks include the following:

(i) to provide diversified, affordable and dependable financial services to the active poor, in a
timely and competitive manner, that would enable them to undertake and develop long-term,
sustainable entrepreneurial activities;
(ii) to mobilize savings for intermediation;
(iii) to create employment opportunities and increase the productivity of the active poor in the
country, thereby increasing their individual household income and uplifting their standard of
living;
(iv) to enhance organized, systematic and focused participation of the poor in the socio-economic
development and resource allocation process;
(v) to provide veritable avenues for the administration of the micro credit programmes of
government and high net worth individuals on a non-recourse case basis. In particular, this policy
ensures that state governments shall dedicate an amount of not less than 1% of their annual
budgets for the on-lending activities of microfinance banks in favour of their residents.

(xxi) Public Offerings: Public offering is a financing option that is only available to companies
that are well established. Businesses with sustainable growth potentials in the course of
expanding their businesses might decide to use public offerings by ‘going public’ to raise
required funds for their business operations. However, before a company decides to use public

24
offerings as financing means, certain factors need to be considered. These factors include; the
cost of the security, other financial obligation of the business, the prospect of the money market,
issues concerning the ownership and control of the business. Public offering usually starts with
selling of equity holding to the public and this is called initial public offering (IPO) in which
stock is registered with the Securities and Exchange Commission (SEC). This is usually offered
to the public through a registered Brokerage firm or an investment Banker and this gives the
organization the opportunity to trade its shares in the floor of the stock exchange market. To get
firms’ shares quoted in the stock exchange market, the firm needs to make provision for the
associated expenses, filling requirements and other equity considerations. Many Small and
Medium Scale Enterprises consider these requirements as stringent conditions and this affects
their readiness to undertake IPO as a financing option.
Public offerings usually result in long term sources of funds which include the following:
(a) ordinary shares
(b) preference shares
(c) debentures

(a) Ordinary Shares: Ordinary shares represent the ownership position in an organization.
Ordinary shares holders are also called shareholders and the risk bearers of the firm. Their rate of
dividend is not fixed rather it depends on the discretion of the management. Ordinary shares can
be issued at par, discount or premium. The rights of shareholders include:
(i) right to participate in the annual general meeting and vote;
(ii) right to appoint a proxy;
(iii) right to have access to the organization’s books; and
(iv) right to contribute to the appointment of members of the board.

(b) Preference Shares: Preference shares as a long term source of funds are certificates of
ownership in organizations that usually have a fixed rate of dividends which must be paid before
ordinary share dividends. It is considered as a hybrid security because it has many features of
both ordinary shares and debentures. The types of preference shares include: cumulative and
non-cumulative preference shares, redeemable and non-redeemable preference shares,
participating and non-participating preference shares.
The following features make preference shares to be in the class of ordinary share:
(i) the non-payment of dividends when the company is insolvent;
(ii) dividends are not deductible for tax purposes; and
(iii) some preference shares have no fixed maturity date.
On the other hand, the following features make preference share to be in the class of debenture:
(i) fixed rate of dividends;
(ii) preference shares do not share in the residual earning of the firm; and
(iii) preference shareholders have claims on the income and assets of the business before the
ordinary shareholders in the time of winding up.

(c) Debentures: Debentures are certificates of debts and they are long term sources of funds that
give the holders the opportunity to collect the principal amount at a fixed future date. Debentures
have definite interest rate which is payable at annual basis until the capital sum of the amount
borrowed is fully paid. They are issued in units of hundred and the interest rates depend on the

25
prevailing interest rate in the money market and financial condition of the firm. The following
are the features of debenture:
(i) debentures are negotiable instruments;
(ii) the interests on debenture are tax-deductible;
(iii) they have a fixed coupon rate;
(iv) debentures are redeemable at specific date;
(v) debenture holders do not participate in the control of the firm; and
(vi) debentures are secured either on floating or fixed assets.

(xxii) Small Business Investment Organizations

These can be government owned or private owned with debts being government guaranteed.
Small business investment organizations can be regular or specialized, for example, giving loans
only to agro-business or manufacturing firms, business research, product research and
development, business start-ups and minority/vulnerable groups. Unlike traditional venture
capital companies, they use private funds or government funds to provide both for debt and
equity financing to small businesses. Examples of institutions under this category are - Small and
Medium Industries Equity Investment Scheme (SMIEIS), Central Bank of Nigeria (CBN,
National Economic Reconstruction Fund (NERFUND), National Bank for Commerce and
Industry (NBCI), Small Scale Industries Credit Scheme (SSICS).

Questions:
Discuss the various sources of funds that are available for the Nigerian entrepreneurs in the
following classification:
(i) Equity sources of funds (ii) Short-term sources of funds (iii)Medium-term sources of funds
(iv) Long-term sources of funds

INTERNAL AND EXTERNAL SOURCES OF FUNDS

Internal financing is the term for a firm using its profits as a source of capital for new
investment, rather than distributing them to firm's owners or other investors and obtaining capital
elsewhere while external financing consists of new money from outside of the firm brought in
for investment. External financing is the phrase used to describe funds that firms obtain from
outside of the firm. It is contrasted to internal financing which consists mainly of profits retained
by the firm for investment. There are many kinds of external financing. The two main ones are
equity issue which is also considered as external financing are accounts payable, and taxes owed
to the government. External financing is generally thought to be more expensive than internal
financing, because the firm often has to pay a transaction cost to obtain it. Internal financing is
generally thought to be less expensive for the firm than external financing because the firm does
not have to incur transaction costs to obtain it, nor does it have to pay the taxes associated with
paying dividends.

Advantages and Disadvantages of internal financing

Advantages of internal sources of finance include the following:
i. capital is immediately available; ii there is no interest payable on such fund; iii. there is no
control procedures regarding the credit worthiness of the owners; and iv there is no third party’s
influence.

26
Disadvantages of internally sourced funds
i. It is somehow expensive.
ii. It does not easily increase capital. iii. It is not as flexible as external financing. iv. It is not tax-
deductible. v . It is limited in volume because it is subject to the capability of the owner(s) to
raise fund internally.

FORMAL AND INFORMAL SOURCES OF FUNDS

Formal sources of funds represent those institutions that are registered with appropriate
authorities to transact the business of finance with entrepreneurs. Examples of formal sources of
funds include loans from commercial banks, insurance company etc. Formal financial services
are usually provided by financial institutions that are controlled by the government and subject to
banking regulations and supervision. On the other hand, informal sources of funds are provided
outside the structure of government regulations and supervision. Examples of informal sources
of funds include those groups or individuals that are involved in loan disbursement with little or
no formal regulations e.g. Esusu, thrift savings scheme, cooperative society etc.

Advantages of formal sources of finance

(i) Provides proper guidelines and documentation for loans.
(ii) Business advisory support from the banks that is lending.
(iii) Helps the entrepreneur to stay focused on the business because of interest rates.
Advantages of informal sources of finance
(i) It helps entrepreneurs to have easy access to funding.
(ii) Less documentation is involved in loan process.
(iii) Entrepreneurs do not stand the risk of loss of assets or business to the institution.

Questions
(i) Distinguish between internal and external sources of funds
(ii) What are the major differences between formal and informal sources of funds?
(iii) Why are internal sources of funds more important than external sources of funds?

CONCEPT, METHOD AND TYPE OF FINANCES PROVIDED BY VENTURE

CAPITAL
The Concept of Venture Capital
Venture capital originated in the late 18th century but it only became popular in the industry in
the late 1970s and early 1980s when a number of venture capital firms were founded as
entrepreneurs found wealthy individuals to back their projects on an ad hoc basis. Venture
capital funds may be described as pools of capital constituted for investing in relatively high-risk
opportunities. It provides long-term, committed share capital, to help unquoted companies grow
and succeed. The venture capitalist makes money by owning equity in the companies they invest
in. These companies usually have a novel technology such as biotechnology, IT, software, etc.
The venture capital firm that puts in money in new entrepreneurial venture recognizes the risk
inherent in the funding exercise. There is a serious risk of losing the entire investment, and if not
loss of money invested, it might take a long time before any profit and returns materialize from
such investment. However, where there is good management in place, there may be prospect of
very high profits and a substantial return on such investment. That is why a venture capitalist

27
will always require a high expected rate of returns on investments, as a compensation for the
high risk inherent in the transaction.

Venture Capital Funding

Obtaining venture capital is substantially different from raising debt or a loan from a lender. In
capital venture, lenders have a legal right to interest on a loan and repayment of the capital,
irrespective of the success or otherwise of the business. As a shareholder, the venture capitalist's
return is dependent on the growth and profitability of the business. This return is generally
earned when the venture capitalist sells his or her shareholdings to another owner. Venture
capitalists are typically very selective in deciding where to invest in; as a rule of thumb, a fund
may be invested in one of the hundred opportunities presented to it, looking for the extremely
rare, yet sought after, qualities, such as innovative technology, potential for rapid growth, a well-
developed business model, and an impressive management team. Of these qualities, funds are
most interested in ventures with exceptionally high growth potential, as only such opportunities
are likely capable of providing the financial returns and successful exit event within the required
timeframe (typically 3–7 years) that venture capitalists expect.

Financing Stages in Venture Capital

Six stages are involved in venture capital financing and they are as listed below:
(i) Seed Money: This is a low level financing needed to prove a new idea, often
provided by angel investors.
(ii) Start-up: This stage deals with firms that are in their early stage that need funding
for expenses associated with marketing and product development.
(iii) First-Round: This stage covers early sales and manufacturing funds of firms.

(iv) Second-Round: It includes funds that are used for financing of the working capital
for early stage companies that are selling products or services but make little or no
profit from the business.
(v) Third-Round: Also called Mezzanine financing. This is expansion money for a
newly profitable company.
(vi) Fourth-Round: Also called bridge financing. This is used in financing companies
that want to "go public".

Types of Venture Capital Venture Capital firms differ in their approaches, certain factors
influence the venture capital decisions and these include:
(i) some venture capital firms tend to invest in new ideas, or fledgling companies. Others prefer
investing in established companies that need support to go public or grow.
(ii) some invest solely in certain industries.
(iii) some prefer operating locally while others will operate nationwide or even globally.
(iv) some may want a quicker public sale of the company or expect fast growth. The amount of
help a venture capital provides can vary from one firm to the next.

The Positions in Venture Capital Firms

The following positions are obtainable to venture capital firms:
(i) Venture Partners: Venture partners are expected to source potential investment opportunities
and they are typically compensated only for those deals with which they are involved.

28
(ii) Principal: This is a mid-level investment professional position, and often considered a
"partner-track" position. Principal venture capitalists are usually promoted from a senior
associate position or who have commensurate experience in another field, such as investment
banking or management consulting.

(iii) Associate: This is typically the most junior apprentice position within a venture capital firm.
After a few successful years, an associate may move up to the "senior associate" position and
potentially principal and beyond. Associates will often have worked for 1–2 years in another
field, such as investment banking or management consulting.

(iv) Entrepreneur-in-residence(EIR): Entrepreneur in residence are experts in a particular

domain and perform due diligence on potential deals. EIRs are engaged by venture capital firms
temporarily (6 to 18 months) and are expected to develop and pitch startup ideas to their host
firm although neither party is bound to work with each other. Some EIRs move on to executive
positions within a portfolio company.

Businesses that are Attractive to Venture Capitalists

Venture capitalist prefers to invest in "entrepreneurial businesses". This does not necessarily
mean small or new businesses rather; it is more about the investment's aspirations and potential
for growth, rather than the size of the business. The growth potential of a business is a primary
factor for attracting the interest of a venture capitalist who ensures that the business is managed
by experienced and ambitious teams who are capable of turning their business plan into reality.

Sources of Finance for Venture Capital Firms

Venture capital firms raise their funds from several sources. To obtain these funds, venture
capital firms have to demonstrate a good track record and the prospect of producing returns more
than what is achievable through fixed interest or quoted equity investments. Most venture capital
firms raise their funds for investment from external sources such as; pension funds scheme,
insurance companies, mutual funds, public offerings from interested investors and private
placements. Venture capital firms' investment preferences may be affected by the sources of their
funds. The term of the investment is often linked to the growth profile of the business. Many
funds raised from external sources are structured as ‘limited partnerships’ and usually have a
fixed life of 10 years while they retain their investment in business for period of three and five
years. That is the reason why venture capitalists prefer to invest in businesses with high effective
performance where they are sure of maximizing their returns within the stipulated period of time
of investment.
Before a venture capital firm can invest in any business, information on the following are
important:
(i) Good business plan/feasibility report.
(ii) Technical know-how of the promoters of the business.
(iii) Product or service commercially viability.
(iv) Potential sustainability of growth for the business.
(v) Whether management have the ability to exploit this potential and control the company
through the growth phases.

29
 (vi) Forecasting techniques and accuracy of past forecasting.
(vii) Assumptions on which financial assumptions are based.
(viii) The latest available management accounts, including the company's cash/debtor
positions
(ix) Bank facilities and leasing agreements.
(x) Pensions funding.
(xi) Employee contracts, etc.
(xii) Does the possible reward justify the risk?
(xiii) Does the potential financial return on the investment meet their investment criteria?

Methods of Valuation Used By Venture Capital

The following steps are mostly used as methods of valuation by venture capital firms:
(i) Identification of the amount of capital to be invested by the investor.
(ii) Identification of the target rate of return expected by the investor.
(iii) Estimation of the multiple of the original investment that will fetch the required rate of
return over the anticipated holding period.
(iv) Projection of the market value of the firms based on performance projected during the
proposed year of existence.
(v) Estimate the percentage of the projected value that the investor needs to claim in order to
achieve his return objective.

Investment Process of a Venture Capitalist

The investment process, from reviewing the business plan to actually investing in a proposition,
can take a period between one month to one year except in some exceptional cases where it takes
extremely long time frame due to the volume of information involved. The key stage of the
investment process is the initial evaluation of a business plan. Most approaches to venture
capitalists are rejected at this stage. Venture capital investments are often accompanied by
additional financing at the point of investment. This is usually the case where the business in
which the investment is being made is relatively well-established. In this case, it is appropriate
for a business to have a financing structure that includes both equity and debt. To support an
initial positive assessment of a business proposition, the venture capitalist will want to assess the
technical and financial feasibility in detail.
The professionals that venture capital use to access a business may include: business
consultants/analysts, lawyers, chartered accountants, engineers etc. External consultants are often
used to assess market prospects and the technical feasibility of the proposition, unless the venture
capital firm has the appropriately qualified people in-house. Chartered accountants are often
called on to do much of the due diligence, such as to report on the financial projections and other
financial aspects of the plan. These reports often follow a detailed study, or a one or two day
overview may be all that is required by the venture capital firm.

How is Venture Capital (VC) different from banks?

Banks provide term loans and working capital limits to companies. The company has to make
interest payments and pay back the principal within a stipulated timeframe. In comparison, VC
subscribes to the equity shares of a company for a stake in the company at a negotiated valuation.

Questions

30
(i) What is venture capital?
(ii) What are the methods that can be used to value venture capital?
(iii) List and explain Venture Capital Financing Stages.
(iv) What are the factors that influence the venture capital decisions?
(v) Enumerate rewards to Venture Capital.
(vi) Explain alternative sources of funds to venture capital.
(vii) What are the information that are necessary for consideration of venture capital?

GOVERNMENT INITIATIVES IN FUNDING SMALL AND MEDIUM ENTERPRISES

(SMEs) IN NIGERIA
The importance of the SMEs to the economic development and growth of both developed and
less developed economies had earned them a worldwide recognition. Several efforts from both
government and international agencies have been directed towards enhancing the operations of
SMEs especially in the area of financing. These schemes are making much impact to ensure that
the objectives of SMEs are achieved in terms of job creation, poverty alleviation, skill supply,
infrastructure provision etc. in the Nigerian economy. In order to make the SMEs sector more
vibrant, the Central Bank of Nigeria evolved new initiatives, which are geared towards
improving accessibility and availability of credit to the SMEs through the following schemes:

(i) The Small and Medium Industries Equity Investment Scheme (SMIEIS)
Bothered by the persistent decline in the performance of the industrial sector and with the
realization of the fact that the Small and Medium Scale Industries hold the key to the survival of
the manufacturing sector and other productive sectors of the economy, the Central Bank of
Nigeria successfully persuaded the Bankers’ Committee in 2000 to agree that each bank should
set aside 10 percent of its annual profit before tax for equity investment in small and medium
scale enterprises. To ensure the effectiveness of the programme, banks are expected to identify,
guide and nurture enterprises to be financed under the scheme. The activities targeted under the
scheme include agro-allied, information technology, telecommunications, manufacturing,
educational establishments, services, tourism and leisure, solid minerals and construction. The
scheme was formally launched in August 2001. With the introduction of the scheme, it is
expected that improved funding of the SMEs will facilitate the achievement of higher economic
growth. As at August 2002, the sum of N11.572 billion had been set aside by 77 banks. Out of
this amount, N1.692 billion had been invested in the small and medium scale enterprises.

(ii) Nigerian Agricultural, Cooperative and Rural Development Bank (NACRDB)

Nigerian Agricultural, Cooperative and Rural Development Bank (NACRDB) was established in
October, 2000 as an amalgamation of the Peoples Bank of Nigeria, Nigerian Agricultural and
Cooperative Bank and the Family Economic Advancement Programme (FEAP). The primary
aim for setting up this scheme is to finance agriculture as well as small and medium enterprises.
It is structured to accept deposits and offer loans /advances in which the interest rates are usually
in proportion to the reason for taking the loan, mainly for Nigerians and their business. Other
services offered by the NACRDB include target savings: Loan for start – up ventures and
smallholder loan schemes.

(iii) The Bank of Industry

31
The Bank of Industry (BOI) was establish in 2000 as an amalgamation of the former Nigerian
Industrial Development Bank, the Nigerian Bank for Commerce and Industry and the National
Economic Reconstruction Fund (NERFUND). The main objective for setting up BOI is to
provide credit to the industrial sector, including the SMEs.

(iv) Refinancing and Rediscounting Facility (RRF)

This programme was introduced by the Central Bank of Nigeria in January 2002 to offer
financial assistance at concessionary interest rate to support medium to long term bank lending to
the real sectors of the economy. The primary objective of this programme is to provide liquidity
to banks in support of their financing of the productive sector activities of Nigerian economy.
This was meant to bridge the gap in financing projects that are mainly long term since banks
mainly gives short term loans and loans for commerce and trade. The medium and long term
business operators, who are involved in productive sectors of the economy, are to be encouraged
through this facility. Banks that are facing liquidity problems as a result of having committed
their resources to long term financing to the specified productive sectors are relieved through the
activities of RRF. The following sectors are included for the RRF loan schemes: agricultural
production, semi manufacturing and manufacturing, solid minerals and information technology.
Under the facility, banks shall have access up to 60 percent of qualifying loans. Qualifying loans
must have been held for not less than one year.

Other Government Financing Incentives which had one time functioned include:
(v) Small Scale Industries Credit Scheme (SSICS)
The Small Scale Industries Credit Scheme was introduced in 1971, as a revolving grant by the
Federal and State Government, to assist in meeting the credit needs of small scale enterprises on
relatively more liberal conditions than in private lending institutions as commercial banks.

(vi) Nigerian Bank for Commerce and Industry (NBCI)

The NBCI operates as the apex institutional body for financing SMEs in addition to its normal
banking operations, the bank also administers the Federal Ministry of Industry (FMI) special
fund for small scale enterprises to secure loan from the bank to finance a particular project, the
applicant for such loan must fulfill the Bank’s requirements to source at least 20 percent of the
investment from his own personal resources to show commitment.

(vii) National Economic Reconstruction Fund (NERFUND)

The Federal Government in furtherance of its programme and commitment to boosting SMEs in
it industrialization drive has set up a fund for the financing of SMEs. The fund known as
National Economic Reconstruction Fund (NERFUND) was established under decree number 2
of 1989. According to the President, the fund is a “crucial policy instrument for stimulation of
valid Small and Medium Scale Industries and Agro Allied Enterprises for economic
development”.

(viii) World Bank Facility for Small and Medium Scale Enterprises (SMEX) Loan
In order to further promote the growth of the SMEs, the Federal Government also negotiated
further financial assistance with the World Bank to complement other sources of funding for the
SMEs. This involves a loan of US$270 million of which US$265.7 million is to be made

32
available for on lending to SMEs through eligible participating banks. The SMEX is managed
directly by the SME Apex unit loan scheme located in the Central Bank of Nigeria (CBN).

(ix) Nigerian Export and Import Bank (NEXIM)

NEXIM was established in January 1990 to manage a number of credit facilities introduced
specifically to boost Nigeria’s non-oil export sector. The establishment of NEXIM was also
intended to support farmers and other small scale exporters to have direct access to international
markets. The facilities offered by NEXIM include the export stimulation loan (ESL), the foreign
facility (FF) and the refinancing and rediscounting facility (RRF). Various financing methods of
small scale business could be loan and bank overdraft.

Questions
Write short notes on the following:
(i) The Bank of Industry (BOI)
(ii) The Small and Medium Industries Equity Investment Scheme (SMIEIS)
(iii) Nigerian Agricultural, Cooperative and Rural Development Bank (NACRDB)
(iv) National Economic Reconstruction Fund (NERFUND)
(v) Small Scale Industries Credit Scheme (SSICS).

Questions
(i) What are the benefits of using equity funds to run a family business?
(ii) What are the cost implications of using debt financing for a family business?
(iii) What are the consequences of going to a bank for financial assistance for a new business?
(iv)What type of credit policy can you advise the chief executive J&J Nig. Ltd to adopt for
building a strong future for the business?

RESOURCE GUIDE
Akanbi, M ,Akinbola, O and Ogbari, M. (2011). “The Effects of Equity Financing on
Entrepreneurship Development in Lagos State”.IJMBS Vol. 1, Issue 2, June 2011 " Retrieved on
15th September, 2011, http//www.ijmbs.com
Emmanuel, C. L. (2010). Entrepreneurship: A Conceptual Approach, Lagos, Concept
Publications.
Hampton, J. J. (1989). Financial Decision Making: Concepts, Problems and Cases, 4th Edition,
New Delhi, Prentice-Hall of India, Ltd.
Hubbard, Kashap and Whited, (1995)."Internal Financing and Investment", Journal of Money,
Credit & Banking, Vol. No.
Jose, E, Miguel, A. and Gianni, R. (2008). "The Formal and Informal Equity Funding in Chile"
Retrieved on 26th October, 2009 from (www.google.com)
Lawal, A. A. et. al. (2007).Entrepreneurship Development in Small Scale Business, Lagos,
Adeola Printing Press Ltd.
Obebe, K. (2008). Legal Considerations for Start-up Companies in Nigeria: Equity Financing for
Entrepreneurship, http://www.google.com/
Otokiti S.O. (2003). Global Project evaluation and appraisal-Pumark publishers, Lagos.
Oyekanmi, R. (2005), Challenges of finance schemes on entrepreneurship. Journal of Lagos
Small and medium enterprise; SME Managers Limited, 1-22.
Osuagwu, L. (2001). Small Business and Entrepreneurship Management, Lagos, Grey

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Resources Limited.
Pricewaterhousecoopers PWC (2010). Venture Capital Guide -.Three Keys to Obtaining Venture
Capital. Publisher
Robin, L. and Sue, M. (2006). Entrepreneurship, and Innovation Concepts, Contexts and
Commercialization: Elsevier Ltd, Netherlands.
Storey, D. (2005). "Entrepreneurship, Small and Medium Sized Enterprises and Public Policies",
In Z, J, Acs and D, Audretch (eds,) Handbook of Entrepreneurship Research An
Interdisciplinary Survey and Introduction. New York: Springer; 473-511,
Urwick and Hunt (2002).Business Strategy and Management. Principles,
http://www.oppapers.com/essays/Strategy-Management/570590

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 MODULE 4
ENTREPRENEURIAL MARKETING (DRAFT COPY)

OBJECTIVES OF THE MODULE

1. Explain marketing and its essence and benefits to organizations in general
2. Discuss marketing in the context of small businesses
3. Explain the fundamental differences between small business marketing and large business
marketing
4. Discuss the use of the marketing mix in the context of new ventures
5. Expose students to the significance of unique selling propositions from the customers
perspective
6. Discuss the dynamics of International marketing

LEARNING OUTCOMES
Upon completion of this module, students are expected to have
1. Understood the concept of small marketing and how it aids the development and growth of
small businesses
2. Learnt the major differences between small business marketing and marketing for large
organizations
3. Understood the pillars upon which marketing rests (marketing mix) and how they are
deployed in new ventures
4. Learnt the importance of developing a unique selling proposition and how it helps to endear
customers to the products and services of new firms
5. Understood the concept of International marketing and its dynamics

ACTIVITIES
1. Have students read Handout 1 and explain to them the concept of marketing and
misconceptions often associated with it. Furthermore, students will be made to understand the
key factors that make small business marketing distinct from marketing embarked upon by large
organizations. These include among others:

rences on strategy

Students will be asked questions like (a) Define marketing with the aid of examples and
activities around your immediate environment. (b) What are the major misconceptions about
marketing? (c) Explain the major differences between small business marketing and large
business marketing.
2. Have students read Handout 2 and explain to them the pillars upon which marketing rests –
Four Ps (Product, Price, Promotion, and Place) and how they could be explored for the benefit of
ventures that are new.
Students will be asked questions like (a) Define the terms product; price; promotion; and place
(b) How can new ventures benefit from the marketing mix?

35
3. Have students read Handout 3 and explain to them the significance of differentiation in
marketing and why it is referred to as Unique Selling Proposition (USP). In essence, they should
understand what separates the product or service of an organization from another and serves as a
major determinant for purchase or patronage. The students will asked to define USP and explain
how new organizations can pursue differentiation to put them ahead of the competition.
4. Have students read Handout 4 and explain to them the concept of International marketing and
why organizations seek to do business outside their immediate geographical borders and the
possible entry strategies they could adopt.

MARKETING FOR BOTH SMALL AND LARGE BUSINESSES

Background: Organizations (small and large) the world over keep growing in number coupled
with the increasing number of customers they have to serve. Due to this, organizations are faced
with the challenge of knowing where their customers are, what they desire and how they will
love to be served. Furthermore, since these teeming customers have several options to choose
from, each organization has to try and get the attention of the customer in order to have him/her
develop preference for its product over that of the competition.

Marketing: Very often when people think of marketing, what comes to mind will include the
billboards (see appendix 1 – 4) that abound in various locations of the city where they reside; the
radio jingles that they heard over the radio the previous day; the handbills they were given when
they visited a shopping mall the previous week; the colourful advertorials they saw in center
spread of magazines or newspapers; the television advertorials promising that the product being
advertised is the best there is on earth; the recent promotion by a telecommunication company
promising 50% bonus airtime for all recharge in the next three days.
In essence, it will be right to say that marketing is one of the most misunderstood business
disciplines. Too often it is assumed to be just one aspect of what it involves – promotion. In
reality, marketing is a specialist activity that influences the success of any organization whether
small or large. In very pedestrian language, marketing can be conceptualized as a process that
enables people obtain their needs or wants from organizations that have developed products or
services that will help satisfy these needs or wants of people. These products or services are
offered to people who are at liberty to exchange them for something of value.

The implication of this definition is that successful marketing rests on the premise that proper
need assessment has to be carried out to determine what the market desires or is lacking. Then, a
product is conceived and designed to fill that gap and priced appropriately and communicated to
the market and made available with minimum inconvenience for the customer. The language in
marketing is deliberately general. For instance, purchasers are referred to as customers, though a
service organization such as a firm of accountants will call them clients; telecommunication
company will call them subscribers; a school will call them students; a hospital will call them
patients and a hotel will call them guests. Similarly, a product may well be a service but the word
product is often used to refer to both.

Small Business Marketing: Marketing forms the cornerstone for the initiation, growth and
subsequent profitability of a small business. Without marketing and a marketing strategy, a
business cannot survive and prosper. For the entrepreneur or small business owner, marketing is

36
a matter of determining demand, matching a product or service with customer needs, and
promoting those attributes in the marketplace to produce sales and make profit in the process.
Every marketing plan has to adopt the same marketing procedure, but the similarities between
small business and large business marketing stop right there. Budget constraints, staffing,
creative methods and strategy vary considerably between Airtel Networks Limited and a
relatively micro-budget marketer and business owner like the small corner shop in your
neighbourhood.
Large businesses measure the results of marketing campaign by how many people know and
recognize their brand. Their goal is to get their name out there into the world. They also have
larger budgets and want to spend that money to put their name into everyone’s head.
Small business marketing measures results at a micro level. The concern is to determine how
many extra customers were got and whether there is any increase in sales. The budget is usually
small and campaigns are organized in a more refined way. The ultimate goal is to get the
customers in through the door to spend their money – not to get inside everyone’s head.

Differences between Small Business Marketing and Large Business Marketing

a) Budget Constraints: In a small business one thing is very obvious and that is operating on a
lean budget particularly as it relates to marketing plan. The huge organizations sometimes called
corporate titans, have astronomical budgets to cover their promotions. They are able to pay for
airtime on TV which in some cases could cost as much as N1million for barely 15 minutes
(prime time) or sponsor certain programmes which cost a fortune. These activities make their
presence known to virtually everyone in the country. In essence, they have the wherewithal to
send out effective messages which are often sent to a mass audience. In the case of the small
business operator, One Hundred Thousand Naira is a major expenditure that must be looked at
very closely and justified before parting with value. They are better able to send out personalized
messages and distribute in a manner that guarantees a better chance of reaching their audience.

b) Staffing: When you peruse through the organogram of a big corporation like Globacom
Nigeria Limited, you will find the Commercial Director Marketing at the helm of affairs. He has
six Divisional Directors with six Business Development Managers assisting them. Then there are
48 Global Business Directors across the country and well over 50 Area Managers across the 36
states in the country. In addition to these, you will find several
professionals that bother on other aspects that bother on the customer. In contrast, small
businesses combine marketing with the leadership role. The organization chart of a small
business puts responsibility for marketing in the top box, where the business owner manages the
process as a hands-on task. In essence, you will not have the luxury of professionals as in the
Globacom example.

c) Differences in Creativity: Large companies like Cadbury Nigeria Plc. routinely require
millions of Naira to produce advertorials with the single purpose of establishing brand awareness
and market orientation. Small businesses adopt a significantly different method. They strive to
establish brand awareness just like Cadbury does, but their advertisements have to fulfill two
tasks. One, the expenditure has to provide direct and measurable marketing action. Two, each
action has to stir adequate buying activity to compensate the expenditure involve in producing
and running the advertisement in the first place.

37
d) Differences on Strategy: In large companies like Nigerian Bottling Company Plc. documents
of business plans are numerous and probably found on bookshelves in the company. In the case
of small businesses, the term marketing plan may sound like rocket science to the owner.
Interestingly, a marketing work plan is quite simple and fairly manageable. If you spend a bit of
your time to design your annual marketing plan, then implementation of this plan becomes really
easy. Note that without a proper marketing plan, you will spend the year racing around to deal
with competitive actions, media opportunities and market conditions that may or may not match
your present business expectations.

e) Customer Interaction: Small businesses have the capacity to interact directly with their
customers, get to know them on a personal level, and learn exactly what their needs are. More
often than not, large organizations do not have this luxury.
As entrepreneur, you may occasionally envy the huge budget and staffing of large organizations,
but being small has its own unique advantages. Imagine the complexity of Cadbury Nigeria Plc.
trying to understand and know its numerous customers. Meanwhile, you are able to meet with
your customers personally perhaps on a daily basis at virtually no extra cost to you. Since the
significant point of marketing is to establish and sustain customer loyalty, it stands to reason that
nothing is more adaptable, more resilient and more flexible than the small business.
MARKETING MIX IN NEW VENTURES
Marketing is a process that encompasses a number of activities that are interrelated and
interdependent. Quite simply, the marketing mix is the unique blend of the elements of
marketing that will apply to the business. These elements are: product or service itself; the
location of the business; the distribution methods adopted by the business; the price at which the
products will be sold; the advertising and promotion alternatives available to the business; and
how the product will be sold as well as the level of customer service to be provided. These
elements are often summarized and commonly referred to as the 4Ps - product, price,
promotion and place.
The understanding of these elements and flair with which they are mixed is fundamental. In
essence, creativity and imagination must be brought to bear. If this is done well, it will put the
organization ahead of the competition.

Product: This is anything offered that is capable of satisfying a particular need or want. Products
in the context of marketing discourse are tangible and when you pay for them you hold onto
something that you can see, touch and feel. It is important for entrepreneurs to understand people
never buy products but buy benefits. For example, one buys a car because he needs something to
commute with. So in the event that the car develops a major fault and has to be parked in his
garage before the spares are sourced, would he be happy looking at the car? Certainly he would
not be because what he bought can no longer provide the benefit he sought during purchase. This
part of marketing concentrates on the product / service the business is going to sell. Retailers and
manufacturers will concentrate their products whereas services industry people (teachers,
doctors, leisure centers) will concentrate on the service that their customers will receive. The
term product is used to cover both tangibles and intangibles (services). Product decisions require
looking at the following areas: product mix; product features and product support.

a) Product mix: This covers the range of products offered for sale by the organization. The
number of product lines which means the various range of products that are similar in end use or

38
mode of distribution. In essence, an organization could have one or more product lines. To
determine the product mix, it is important that small business owners engage in marketing
research by way of need assessment to determine what people lack or what is currently not being
delivered. It also entails knowing what kind of stock to have, what kind of customers you will
want to serve, what do they like to buy and how they want to buy. Imagine you live in a
neighbourhood where the households need a corner shop to buy cookies and packaged juice for
their kids early in the morning. The only corner shop in the locality does not open until 9am
which creates a lot of inconvenience for the numerous households. An entrepreneur will see an
opportunity here because should he start up a corner shop and open at 7am, the household
members will be glad he did and patronage is a given.

b) Product features: The customers view the product has as much to do with the success of the
business as does the product itself. This is a complex bundle of physical attributes and features. It
is important for the entrepreneur to remember that customer perception will determine success
rather than what he sees in his product. Product features include colour, packaging, labels,
quality, options, style design, brand names, freshness, consistency, sizes, durability, ingredients
and product image among others. For services issues that bother on promptness, efficiency,
expertise, reliability, guarantees, house-call, specialization, and pick up delivery among others
are very fundamental.

Imagine a local vulcanizer in your area who fixes tyres beneath a tree and relies on the old
technology. For the most part you will have to sit on a bench while he works on your tyre. He
needs to use a locally fabricated equipment to remove the tyre from the wheel and fits back
afterwards while using a gauge system that is far from accurate. Compare this against another
entrepreneur who decides to buy the modern machines with accurate gauge equipment.
Furthermore, there is small waiting area where you can read newspapers or watch cable TV
before your tyre is fixed. In addition, the shop provides free tyre gauge services. The latter had
built in more features in the service than the former.

c) Product support: For a business, a sale may be an end result but for the customer it is just the
beginning because he may have challenges with the product from time to time or the service he
is seeking may be too complicated for him to understand. For these reasons, he will require help
by way of support from the bearing in mind that support will to a large extent determine repeat
patronage. Examples of support services include; pre-sale advices, installation, reliable delivery,
prompt follow up, availability of spare parts and after-sales service.

Place: In marketing, a business must have the right product, at the appropriate time and price,
and in the right place. In this context, place refers to two aspects; location and distribution.
Location as a component of marketing of mix is critical to some and almost irrelevant to others.
For example it is critical to a retailer but not necessarily to a “pure water company”. It should be
noted that for many small business operators the choice of location is governed by personal taste:
the desire not to look beyond the local community may be very compelling. Some of the benefits
associated with such a disposition include: the fact that friends and family could be the first
customers and could advertise by word of mouth; the advantage of knowing the needs and
desires of the local market; and it may be easier to obtain micro credit from the microfinance
bank in the immediate environment. The cardinal rule for many business owners is to locate the

39
business where the market is. It is important to know what kinds of persons are likely to be the
customers for the goods / services on offer. Imagine establishing a new dry cleaning business to
cater for individual customers. Through informal marketing research you discovered that most of
those that will require such a service are bankers who leave for work very early and close late.
Your best bet will be to get a location that will be easily accessible with minimum discomfort
since for the most part they will be in a hurry to drop off or pick up.

This is not to say that other factors are not important. For a manufacturing concern, access to raw
materials is key as well as the availability of skilled labour. Distribution has to do with the
channels used to resolve the question of how the products reach the customers - the place where
the purchase will be made. When you walk into a local store in your neighbourhood, you will
probably find well over seven different brands of bread lying on the shelves. Drive a couple of
kilometers away and it is very likely you will find another dozen brands being sold at a very
prominent intersection in the city. Now try to imagine the challenge of getting the raw materials
together and making well over a thousand loafs and then distribute them throughout the city.
This is what thousands of manufacturing firms (small or big) have to contend with every day.
Rarely do organizations deal directly with the final user of their products – consumer. Very often
they have to rely on marketing intermediaries (wholesalers and retailers) who join together to
transport and store goods in their path from producers to consumers. Due to the dynamic nature
of our society the pattern of distribution and demand continues to change. Restrictive thinking
should not prevent the best distribution channel from being utilized. The small business owner
must recognize that there is a constantly changing market and the distribution system represents
an investment and is an asset to the business.

Promotion: This encompasses everything to do with the way an organization communicates

persuasively with people to influence them towards making a purchase. Marketers use many
different tools to promote their products and services. Promotion is sometimes seen as the most
important part of marketing; certainly it is the most visible, with elements of it – advertisements,
posters and so on – all around. It should be known that even the producer of the best product or
service will do no business if no one knows it exists. Similarly promoting a bad product is
certainly the fastest way to kill it. The combination of promotional tools an organization uses is
called its promotional mix.

a) Advertising: This is paid non personal communication through various media by

organizations and individuals who are in some way identified in the advertising message. The
medium of advertising include; television, radio, handbills, billboards (electronic and non-
electronic), newspapers, magazines, music and internet. The best medium is a function of the
product being advertised and the target customers to be reached. Generally speaking, securing
airtime for advertorials in television is quite expensive for most small businesses. Radio jingles
and handbills are fairly more affordable and fit into local advertising. Advertising is carried out
with the following objectives in mind: informing potential customers of a new offering;
increasing the frequency of purchase; increasing the use of a product; increasing the quantity
purchased; increasing frequency of replacement; presenting a promotional programme; bringing
a family of products together; and making the organization behind a range of offerings known. In
summary, advertising can help promote a business but it is important to be aware that it has its
limitations. Some small business owners believe that if their business is failing they can advertise

40
their way out the problem. Sadly, this is not the case because advertising cannot force people to
buy unneeded goods and services. If the business is in the wrong market advertising will not be
able to help. Furthermore, it cannot improve an inferior product. If the product is not adequate or
does not fit the overall marketing mix, advertising cannot compensate.

b) Personal selling: This is face-to-face presentation and promotion of products and services. It
also involves the search for new prospects and follow-up service after the sale. Effective selling
is not simply a matter of persuading others to buy. In fact it is more accurately described as
helping others to satisfy their wants and needs. The major strength of personal selling over
advertising is that it provides a two way communication where the prospect can ask questions
and seek clarification where necessary as against advertising which is strictly one way.
For large businesses this medium is very expensive because their customers are spread all over
as against the small business operator who usually has direct access to his customers and sees
them often.

c) Public relations: This is defined as the function that evaluates public attitudes, changes
policies and procedures in response to the public’s requests, and executes a programme of action
and information to earn a public understanding and acceptance. In essence, a good public
relations (PR) programme has three steps. (1) Listen to the public through marketing research.
(2) Change policies and procedures to accommodate the concerns and aspirations of the public.
(3) Inform people that you are being responsive to their needs. For most small businesses PR
means obtaining free publicity via stories placed in newspapers, radio and TV with the objective
of bringing attention to the business. The value of this approach is that it has a higher degree of
credibility than an advertisement. Sponsorship of a local sporting event is also good publicity.
Many businesses tend to overlook the importance of PR. Some are prepared to develop their own
PR strategies and have the talents within the business to achieve satisfactory results, whilst some
are unsure how to correctly handle this area and will employ outside expertise.

d) Publicity: This is talking arm of PR. It is one of the major functions of almost all
organizations. Publicity is any information about an individual, product or organization that is
distributed to the public through the media and that is not paid for, or controlled by the seller. In
essence, it can be viewed as a form of free advertising. To use this properly, a small business
owner must attempt to feed to the media information that is of public interest. Whether the media
uses the information submitted to it depends on whether time and space are available and
whether it is considered “newsworthy”. Different publications have different audiences and only
stories that have high interest to the readership are likely to be chosen.
Imagine establishing a small kindergarten school where primary education has been a major
challenge or a small business engaged in nymph oil extraction for the treatment of skin diseases
which has been a cause for concern in that community. Note that in both cases, the public will be
very receptive to the news and help spread to others. The magic is that the various media will
publish these stories free since the material is interesting and newsworthy. It has a major
advantage over advertising because publicity may reach people who will not want to read or pay
attention to an advert. In addition, when a newspaper or a magazine publishes a story as news,
the reader treats that story as news – and news is more believable than advertising.

41
e) Sales promotion: Sales promotions (SP) are used to help promote the sale of the product or
service. They are generally put into place for short time periods to achieve customer attention
and sales. The cost of such promotions must be well controlled and the small business owner
must ensure that results are worthwhile for the outlay involved. SP is considered very effective
because it creates instant demand booster and leverages on the weakness of the average customer
– greed – which makes him buy certain products that he may ordinarily not want to buy at the
time or may not buy that much quantity. SP campaigns could be used in the following scenarios;
(1) To move products or services that have slowed down probably created by loss of buyer
interest or change of buying season. (2) To win back customers who have moved to competitors
for reasons such as price, delivery of product, pedestrian packaging among others. (3) To launch
new products. This allows the customers to experience the new product or service. In essence, it
encourages new product trials and brand switching.
SP could be deployed in different ways but some of the very prominent ones include: Offering a
special price reduction for a given period; selling two items for the price of one; adding a product
on or in another product without charging for the added on product; giving out free samples;
sponsoring a game or a contest and organizing raffle draws for those that qualify based on
volume of purchases made over a period of time. Note that the list is endless and only needs
some marketing imagination and flair to make a successful promotion.

Price: The phrase that goes mostly with cheap is poor quality, yet everyone wants a bargain. But
as a bargain is essentially something worth more than it costs (and therefore rare) what they
really want is value for money. ”I am not upset with someone who charges more for a product
but I am concerned with someone who might offer a better experience” – Jeff Bezos, CEO,
Amazon.
In many ways way can think of price in terms of value. People are willing to pay a price that is
commensurate with the value to them of a product or service. How do you make sure that your
offering will be considered valuable to customers? Think about the quality in manufacture, the
styling and fitness to need. When you focus on making improvements in these areas, you will be
increasing the value of your offerings to customers, and that will allow you to charge a price that
you and your customers will consider reasonable. In consumer psychology, the tendency is to see
high price as connoting high quality and low price as connoting low quality. This may not
necessarily be true in all cases but it always tends to influence our judgement during purchase
decisions. Imagine a man that walks into a jewelry shop and sees two sets looking very much the
same to him (does not have expertise) and the first set costs N25, 000 while the second set costs
N46, 000. What will come to his mind is that the latter is of better quality than the former. The
single basis for his judgement is price.
It should be noted that the term price could be used differently depending on the sector and the
context. For example, all these refer to the amount you pay in exchange for the value received.
- - Rent
- - Toll
- - Tariff
- - Dues
- - Tuition

42
Factors Affecting Price
Competition in the market and marketing strategies: In free market economies, the level of
competition in the market place has a great influence on prices charged. The pricing structure
should reflect the competitive strategy the business has adopted. For example, to be a cost leader,
low prices will be the marketing tool to use to gain market share. Alternatively, if the strategy is
differentiation then the business owner must develop an “exclusive” image and be able to charge
more for the product or service. If the marketing strategy is penetration then the business will
consider a drop in price to induce new customers to purchase the product offered.
Demand for your product: Generally the demand for most products varies with price. Usually at
high prices customers purchase less, where at low prices customers purchase more. Some
products or services are price insensitive, i.e. the price can be increased without having much
effect on demand. For other products if the price in increased it can have a huge gap on demand.
These products are said to be price sensitive.

Introducing a new product: The launching of a product that is novel in the market can be an
opportunity for a business to charge a premium without a backlash from the market. This enables
recovery of some of the costs that are associated with the introduction of the new product or
service. After the introduction it may be possible for the business to maintain a high price until a
competitor counters with something similar and the price may then need to be adjusted to ensure
a reasonable share of sales. It is certainly easier to reduce prices to meet a competitor rather than
starting at a price structure that is too low and then having to raise prices. This is something that
customers do not appreciate.
If there is need for a small business owner to increase prices, then he needs to consider some of
the following:

prices were raised because there has not been an increase for some time.

increase their prices?

is too high to
start with and signs of slowing sales cause a reduction in prices it may be too late to redeem the
mistake.

this need to be known. Are prices beyond that range? There is a price point that becomes a
barrier to the customer, and beyond it they will no longer consider the product or service.

competitive then the business is not in a position to charge a price that causes a loss of market
share.

UNIQUE SELLING PROPOSITION (USP)

With the increasing level of competition and the presence of so many products and brands that
all appear to look alike, it has become necessary more than ever before for organizations to find
ways to make their products distinct from those of the competition. This simply refers to creating
some differentiation which in marketing discourse means “Unique Selling Proposition”. The
single best way for a small business to get exposure is to discover and showcase its unique focus.
This differentiation provided is meaningful and relevant to your target audience will prevent

43
your business from becoming a “me too” proposition and create a preference for your offerings.
You should be able to quickly and confidently complete this simple sentence: “Our business is
the only _________ that ________”. The first blank is the category your business is in while the
second blank should be filled in with your differentiating factor, the one thing that makes you
compellingly different.

Differentiation: This strategy concentrates on creating something which is perceived industry

wide as being unique. It can be achieved by: creating an image; using new or different
technology; being distinct through product features; being distinct through customer service; or
adopting a different distribution network. Brand names are a form of differentiation. Do you buy
Indomie Noodles or “Baby Noodles” (if it does exist)? Why? What is the perception in the
market of each of these brands? Physical products vary in their potential for differentiation. At
one extreme we find products that allow little variation like chicken and steak meat. Yet even
here some differentiation is possible. For example, in Kano and Abuja, YahuzaSuya Spot has
been able to differentiate its chicken by mode of processing and spicing. This makes the outlook
and taste unique. At the other extreme are products capable of high differentiation, such as
automobiles, computers, among others. Here the seller can differentiate on the basis of form,
performance quality, features, colour, durability and style among others. Small business can
often achieve differentiation by becoming more specialized or by offering distinctive customer
service – more personalized, attention to detail, and quality work. Very often it is a firm’s
reputation that attracts and retains customers. Differentiation may prevent a business from
gaining a large market share, but being unique results in lower sensitivity to price and may allow
higher margins. Also customer loyalty and the need for a competitor to overcome product
uniqueness, provides protection against existing and new competition.

INTERNATIONAL MARKETING
International marketing is the process of planning and conducting transactions across national
borders to create exchanges that satisfy the objectives of individuals and organizations.
International marketing has forms ranging from export-import trade to licensing, joint ventures,
wholly owned subsidiaries, management contracting among others. International marketing very
much retains the basic tenets of ‘satisfaction” and “exchange”.

Questions
1. Why won’t organizations remain in domestic markets if large enough?
2. Why not save themselves the trouble of learning new languages, culture and exposure to
hazards as well as the challenge of product redesign?
3. Why face the risk of possible expropriation?
Answers
1. Some global firms with better products and lesser prices attack local market base thereby
eroding market share of domestic companies.
2. Some foreign markets present higher profit potentials.
3. Some firms go international in order to reduce dependence on a single market
4. The foreign market may present higher customer base thereby helping to achieve the much
sought economies of scale.
5. Some countries do not have enough skilled workers, hence the need to shop for them abroad.
Such skilled labour must be sought for and brought through International marketing.

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Standardization Vs. Adaptation
This addresses the concern of whether companies should have identical products in all countries
or develop products to satisfy local tastes and desires. In the discourse of International
marketing, standardization is sometimes used interchangeably with globalization i.e. treating
entire market as a single one for both production and marketing reasons.

Modes of Market Entry

There are three broad strategies for foreign market entry and each one involves its own level of
commitment, risk and degree of profit. These are Exporting, Joint Venturing and Direct
Investment.

EXPORTING: This is the process of sending items, services or persons from one country to
another in return for goods, money or services. This involves occasional and active exporting of
goods and services. Occasional exporting is a passive level of investment where the company
exports surpluses from time to time and sells goods to resident buyers representing foreign
countries. On the other hand, active exporting takes place when the company makes a
commitment to expand exports to a particular market. However, in either of the two cases, the
company produces all of its goods in the home country and may or may not modify them before
exporting.

JOINT VENTURING
Joint venturing is the second method of entering a foreign market by teaming up with foreign
nationals to set up production and marketing facilities. Joint venturing differs from exporting in
that a partnership is formed that leads to some production facilities abroad, and it differs from
direct investment in that an association is formed with someone in the country. A joint venture is
the association of two or more people to carry out a particular business or contract.

A joint venture can be formed in four ways:

Licensing: This represents a simple way for a manufacturer to become involved in international
marketing. The licensor enters an agreement with a licensee in the foreign market, offering the
right to use manufacturing process, trademarks, patent, trade secret or other item of value for a
fee or royalty. The licensor improves his market coverage at a little risk, while the licensee gains
production expertise or a well-known product or name without having to start from scratch.
Example franchising – KFC in Nigeria.
Contract Manufacturing: - This involves a contract with local manufacturers to produce the
products, which the seller sells. It has the drawback of less control over the manufacturing
process and the loss of potential profits on manufacturing. On the other hand, it offers the
company a chance to start faster, with less risk and with the opportunities to form a partnership
or buy out the local manufacturer at a later date.
Management Contracting: - Here a foreign firm is invited to help run a venture on behalf of a
domestic firm. In this arrangement, the domestic firm usually provides the capital while the
foreign counterpart provides the know-how. This is considered on the strength that the foreign
firm is synonymous with exceptional skills in that particular line of business. They are normally
paid a fee and may be allowed to buy some shares over a specified time frame. Example of
management contracting – Hilton and hotel management.

45
Joint Ownership Ventures: - In joint ownership ventures foreign investors join with local
investors to create a local business in which they share joint ownership and control. The foreign
investor may buy an interest in a local company, or a local company may buy an interest in an
existing operation of a foreign company, or the two parties may form a new business venture.
This may be necessitated due to political consideration or economic constraints or to satisfy a
pre-condition for entry.

DIRECT INVESTMENT
The third strategy that could be employed in order to operate in a foreign market is through
direct investment. In this the firm may invest in foreign-based assembly or manufacturing
facilities by either building a new plant or buying substantial shares in an already existing plant,
or completely buying over an existing plant.
The following benefits are derivable to the foreign investor:
1. The firm may secure cost economies in the form of cheaper labour or raw materials,
government investment incentives, freight savings, and tax concession, etc.
2. The firm will also gain a better image in the host country because it creates job opportunities
to the local nationals.
3. The firm can develop a deeper relationship with the government, customers, local suppliers,
and distributors, enabling it to adapt its products to the local market.
4. The firm retains full control over the investment and therefore, can develop manufacturing and
marketing policies that serve its long-term international objectives.
However, it exposes a firm’s large investment to risk, such risks as devaluation of currency,
worsening markets or expropriation.

Questions
a) Identify the things Ahmad Sabo got wrong from the very beginning.
b) Does he need a marketing manager? Justify your answer.
c) How can he practice differentiation?
d) Will the planned massive promotion solve the problem of the business?

Different Outdoor Adverts (Billboards) Appendix 1 , Appendix 2 , Appendix 3 , Appendix 4

Resource Guide
Joe Girald and Stanley Brown (1999), How To Sell Anything To Anybody, Lagos: SJBS
Ministries.
Patrick Forsyth (2009), Marketing: A Guide to the Fundamentals, London: Profile Books Ltd.
Philip Kotler and Kevin Keller (2007), A Framework for Marketing Management, New York:
Pearson Education Inc.
Philip Kotler and Kevin Lane Keller (2009), Marketing Management, New Jersey: Pearson
Education Inc.
Sarah White (1997), Marketing Basics, New York: CWL Publishing Enterprises.
Thomas Bateman and Scott Snell (1999), Management: Building Competitive Advantage, USA:
Irwin McGraw-Hill.
Williams Nickels, James McHugh and Susan McHugh (2002), Understanding Business, New
York: McGraw-Hill.

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 MODULE 5
NEW OPPORTUNITIES FOR EXPANSION (e-business)

MODULE 5: NEW OPPORTUNITIES FOR EXPANSION

Description/Rationale
This module explores the process and issues involved in conducting business or commerce over
the Internet or World Wide Web. Technologies used to deliver e-Commerce, e-Business, and the
strategies used to launch e-Commerce Web Site will be discussed. Participants will learn
fundamental concepts about e-Commerce, e-Business, and related technologies as well as what it
takes to succeed in this e-driven economy. Definitions, issues, tools, processes, terminologies,
technologies, and best practices will be discussed.

Objectives/Learning Outcomes
Upon the completion of this module, the participants will be able to:
-Commerce, E-business and related technologies,
-Commerce and describe how it differs from e-Business,
r types of e-Commerce/e-Business,

-Commerce web site,

-Commerce technology
-Commerce in Nigeria

Summary Content
1. Introduction
2. What Is e-Business?
3. What Is Commerce?
4. What Is e-Commerce?
5. Difference between E-business and E-commerce
6. Why Study E-Commerce?
7. Types of E-Commerce
8. Key Technologies Enabling E-Commerce
9. Dimensions of E-Commerce
10. E-Commerce Driver for Small Businesses
11. Advantages and Disadvantages of E-Commerce
12. Steps to Starting e-Commerce
13. The State of e-Commerce in Nigeria

Delivery Methodology
This module will be delivered in a variety of ways including:
1. Instructor led lectures, multi-media presentations, interactive and participatory, informal
discussions, and exercises.
2. Research or exercise assignments to apply e-Business/e-Commerce principles using Internet
3. In class small group discussion of questions or assignments.
4. Hands-on activities using computer hardware and/or software;
5. Individual or group project presentations followed by in-class discussion
Duration of Course

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1. INTRODUCTION
Science and Technology have always influenced modes, practices and procedures of business
and trade. The advancement of Science and Technology, more particularly in electronics and
internet, has profoundly influenced the conduct of business in the world. The fast changing
information technology and convergence of various communication technologies have virtually
taken the business practices by storm. The use of Internet has made the world small and through
it, business transactions are conducted globally at a faster pace. The age of connectivity has
reduced distances and brought people closer. This can be directly attributed to the development
of electronics and communication technologies.

Computers and the Internet are now increasingly widely used to function as part of doing
business. Transactions conducted through the Internet have enormous implications on the
international competitiveness of every nation, giving rise to new and exciting opportunities in
national and international industries, the governments and for individuals. Students, lawyers,
doctors, engineers and various other professionals get to access vast information through the
World Wide Web (WWW) network system. It has revolutionized national and international
business transactions because of its numerous benefits. Businesses now use different
technologies and embrace a wide range of methods such as electronic banking, electronic
trading, electronic cataloguing, video conferencing, multi-media communications, electronic data
interchange, electronic mail, facsimile and all forms of messaging between enterprises. Internet-
users have grown phenomenally in the past 5 years and the number is expected to continue to
increase. In this module we describe the use of Internet and other electronic technologies as
means of achieving New Opportunities for Business Expansion.

2. WHAT IS E-BUSINESS?
Electronic Business or e-Business refers broadly to the use of technologies, particularly the
Information and Communication Technologies (ICTs), to conduct business or facilitate improved
business activities and processes, including procurement, operation, manufacturing, marketing
and sales, logistics, human resources management, finance, and research and development.
Originally, the term e-Business refers primarily to the digitally enabled transactions and
processes within an organization, involving information systems under the control of the
organization. E-business does not include commercial transactions involving an exchange of
value across organizational boundaries. These online interactions are aimed at improving or
transforming business processes and efficiency. Over time, e-Business has been known to cover
online transactions, extending to all Internet-based interactions with business partners, suppliers
and customers such as selling direct to consumers, manufacturers and suppliers; monitoring and
exchanging information; auctioning surplus inventory; and collaborative product design. E-
Business, therefore, relates to any commercial activity that is conducted in an electronic format
including commercial transactions conducted via the Internet, telephone and fax, electronic
banking and payment systems, electronic purchasing and restocking, etc. Like the telephone, fax,
and calculator, e-Business is a tool that can enable increased productivity, improved customer
services, and reduction in costs.

48
E-Business is not limited to certain type of business or technology, but includes networking,
allowing sales and marketing activities, purchasing and logistics, production, education, design
and engineering to take place. The most effective use of e-Business is when a business combines
several of these activities allowing information to flow from sales, to purchasing and production.
It facilitates creating more effective external interactions with customers, clients, collaborators
and suppliers, as well as helps improve internal business efficiency and even the emergence of
new products and services.

E-Business could be generally described as any ICT enabled system that suppliers, distributors,
or customers use, as the basis for conducting their business operations, such as:

ces via a web site and/or email;

or customer service by email or web site; and

3. WHAT IS COMMERCE?
Commerce can be defined as the negotiated exchange of goods and services between two or
more individuals and/or companies in which each party hopes to gain a benefit by exchanging
something with the other party (or parties). What is exchanged is generally money. But money is
not the only thing that can be exchanged. For the purpose of this module, we will focus on the
exchange of money for products, goods or services; this has been in practice for thousands of
years.

4. WHAT IS E-COMMERCE?
The advances in Information and Communication Technologies (ICTs) and the emergence of the
Internet have revolutionized business activities enabling new ways of conducting business
referred to as electronic commerce (Zwass 2003; Turban, King, Lee, &Viehland, 2004).
Electronic commerce (e-Commerce) describes the process of buying, selling, transferring, or
exchanging products, services, and/or information through computer networks, principally the
Internet (Turban et al., 2004). Electronic commerce can also be described as the sharing of
business information, maintaining of business relationships, and conducting of business
transactions by means of telecommunications networks (Zwass, 2003).

Due to the invention of internet, web technologies and other electronic devices, a new form of
commerce known as e-Commerce has emerged. Electronic Commerce (e-Commerce) is a set of
technologies, applications, and business processes that link businesses, consumers, and
communities for the purposes of buying, selling, and delivering products and services; as well as
for integrating and optimizing processes within and between participating entities. E-Commerce
builds on traditional commerce by adding the flexibility and speed offered by electronic medium,
thereby facilitating improvement in operations leading to substantial cost savings, as well as
increased efficiency and competitiveness through the redesign of traditional business methods.

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E-Commerce involves the application of ICTs to conduct commercial transactions between and
among organizations and individuals. It could be said to comprise of all commercial transactions
mediated by digital technology (landline telephone, fax, mobile phones, electronic mail and
Internet), between private individuals or commercial entities, which take place in, or over,
electronic networks. The object of the transactions could be tangible or intangible. The only
important factor is that the communication and transactions take place over an electronic
medium. As we will discuss later, e-Commerce is not just about using new technologies, but also
helps to support profitable business relationships and promotes more effective business practices.
“To thrive in the e-commerce world, companies need to structurally transform their internal
foundations to be effective. They need to integrate their creaky applications into a potent e-
business infrastructure.” from the E-Business: Roadmap for Success by Dr. Ravi Kalakota

5. DIFFERENCE BETWEEN E-BUSINESS AND E-COMMERCE

The terms ‘e-Business’ and ‘e-Commerce’ are often used interchangeably, but what do these
words really mean? While the meaning of the words Commerce and Business are essentially the
same in English as nouns describing organized profit-seeking activity, there is a difference
between e-Commerce and e-Business. The difference is quite artificial, but different terms do
carry different meanings. As was mentioned earlier, e-Commerce refers to online transactions -
buying and selling of goods and/or services over the electronic medium especially the Internet.
Electronic business transactions involving money are "e-Commerce" activities.
However, there is much more to e-Business than selling products and services. What about
research, development, marketing, procurement and customer relations? To sell online
successfully, much more is required than merely having a website that accepts credit cards.
Selling online successfully requires a web site that people want to visit, accurate catalog
information, good logistics, and much more. The term "e-Business" highlights the fact that
definition of e-Commerce was too narrow. To be successful, we need to think more broadly.
E-business goes far beyond e-Commerce or buying and selling over the Internet, and deep into
the processes and cultures of an enterprise. E-business is the powerful business environment that
is created when critical business systems are connected directly to customers, employees,
vendors, and business partners, using Intranets, Extranets, e-Commerce technologies,
collaborative applications, and the Web.
A good example of a pioneering e-Business is Dell Computer. The Dell Computer company is
one of the earlier companies that created a ‘fully integrated value chain’ – a three-way
information partnership with its suppliers and customers by treating them as collaborators who
together find ways of improving efficiency across the entire chain of supply and demand. Dell's
Computer suppliers have real-time access to information about its orders. Through its corporate
extranet, they can organize their production and delivery to ensure that their customer always has
just enough of the right parts to keep the production line moving smoothly. By plugging its
suppliers directly into the customer database, Dell Computers has ensured that they will instantly
know about changes in their demand. Similarly, by allowing entry to customers into its supply
chain via its website, Dell enables them to track the progress of their orders from the factory to
their doorstep. Successful new-businesses can emerge from nowhere. Figure 1 shows an
illustration of the difference between e-business and e-Commerce.

Figure 1: Difference between e-Business and e-Commerce

(source E-commerce (business. technology. Society), 2nd Ed., K. C. Laudon& C. G. Traver

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We may therefore say that e-Commerce - which describes the buying and selling of products,
services, and information or making transactions via computer networks, including the Internet -
is a subset of e-Business. While e-Commerce defines interaction between organizations and their
customers, clients, or constituents, e-Business also encompasses an organization’s internal
operations. It means that e-Commerce is using the Internet to order and pay for products and
services, while e-Business covers a broader range of activities that could take place
electronically, as well as via e-mail or the web. While having a web presence is the most
common form of e-Business, it is much more than that.
E-business allows for more efficient and effective linking between departments, development of
a closer relationship with suppliers and partners and better meets the needs and expectations of
clients, leading to improvements in the overall business performance processes.
From the above explanations, it is clear why the two concepts are similar. In other words, these
two can be used interchangeably, bearing in mind the following relationships:

Figure 2: Possible relationships between e-Business (EB) and e-Commerce (EC).

In line with the above discussion, we will henceforth discuss e-Business and e-Commerce
together as one entity, as depicted in relationship A (i.e., EB = EC), using the name e-Commerce.
Moreover, e-Commerce can be individualized, and is applicable to Small and Medium
Enterprises (SMEs).

6. WHY STUDY E-COMMERCE

E-Commerce technology is different and more powerful than any of the past technologies. It has
challenged much of the traditional business thinking, with a number of unique features as
summarized in Table 1.

Table 1. Some Unique Features of e-Commerce

Technology Description Business Significance
Ubiquity Internet/Web technology is available The marketplace is extended beyond
everywhere and anytime traditional boundaries and transcends
geographic location. "Marketspace" is
created and can take place anywhere and
anytime.
Global Reach The technology reaches across Commerce is enabled across cultural and
national boundaries, around the national boundaries seamlessly and
earth. without modification. "Marketspace" -
potentially billions of consumers and
millions of businesses worldwide.
Universal A set of technology standards There is one set of technical media
Standards (Internet) is universal. standards across the globe.
Richness More powerful selling Video, audio, and text marketing
environment with video,audio, and messages are integrated into a single
text messages. marketing message and consuming
experience.
Interactivity The technology works through Consumers are engaged in a dialog that
interaction with dynamically adjusts the experience to

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 the user. Can simulate the individual, and makes the consumer
face-to-face experience, but on a co-participant in the process of
global scale. delivering goods to
the market.
Information Technology reduces info Information processing, storage, and
Density costs & raises amount and communication costs drop dramatically,
quality of information available to while currency, accuracy, and timeliness
all market participants improve greatly. Information becomes
plentiful, cheap, and accurate.
Personalization Allows personalized Personalization of marketing messages
& messages to be delivered and customization of products and
Customization to individuals/groups. services are based on individual
characteristics

7. TYPES OF E-COMMERCE
Several models of e-Commerce or e-Business have been identified and categorized according
to the nature of the market or by the technology used. First we discuss the models based on
market relationship.

A. Business Models based on Market Relationship

i. Business-to-Consumer (B2C):
Virtually all goods and services can be sold to customers online. Transactions of commercial
organizations selling their products and/or services directly to the consumersare known as
business-to-Consumer (B2C). In other words, it is an exchange and transaction of information,
products or services between a business and a consumer(s). It is the interaction to the
purchase/sale of goods and services between a business and consumer(s) (i.e., retail
transactions), including tangible goods such as books, music, collectibles, clothing, consumer
electronics, real estate and airline tickets, as well as intangible services such as financial
information, health information, and digital goods. The “novelty” is that retail transaction is done
on the Internet/Web, rather than in a “brickand mortar” store location.
Many types of business models within this category include:
 Online Retailers/Storefronts – This is the online version of traditional retailer. These
are virtual online merchants that operate retail store only interacting directly with the customer.
They include stores operating online distribution stores as well as physical stores. Other versions
include merchants selling products through online catalog (online version of direct mail catalog),
as well as manufacturer selling products and services directly to customers over the Web. A
number of stores sell goods and services and keep a fraction of the money as fees – e.g, B&M
retailers, Amazon.com, E*Trade, Dell.com.

Advantages Disadvantages
- Easy to use, fast to set-up - Limited layout flexibility,
- All tasks handled on the web, - Generic store design,
- Updates made easily, - User interface may be slow
- No need for a separate web site - Customization may not be possible

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Content Providers – These are companies that provide digital content information
and entertainment over the Web. This was a significant source of e-Commerce
revenue in the early 2000 (second largest source of B2C e-Commerce revenue in
2002). Typical revenue models including subscription pay for download, advertising
and syndication. Examples are Ads only (e.g., original Yahoo), Wall Street Journal
online, and ThisDay Newspaper online subscription.

Advantages Disadvantages
- More control over layout & design, - Requires installation & set-up,
- Good for firms with existing web - Requires some technical knowledge,sites,
- Highly customizable - Usually needs additional programming.

Portals – Portals are commonly used by companies that offer powerful search tools plus an
integrated package of content and services. Portals which could be designed to be generalized or
specialized utilize a combination of subscription or advertising revenues as well as transaction
fee model.

Transaction Brokers – This is a model that processes online transactions for consumers. The
primary value proposition is saving time and money for its customers, while charging some
transaction fee. Companies using this model include (a) financial services, (b) Travel services,
and (c) Job placement services.

Service Providers – As the name implies this model offers services online for its customers
while charging subscription fees or one-time payment. The value proposition is to offer service
to its clients that are valuable, convenient, time-saving, and low-cost alternatives to traditional
service providers.

Market Creators – In this model, a company uses Internet technology to create marketplace that
brings buyers and sellers together. The revenue model is typically a transaction fee. Notable
examples include eBay.com and Priceline.com.

Advantages Disadvantages
- Potentially high visitor traffic, - May not be able to use your domain name,
- Site creation & maintenance - Must conform to site policies,
- performed in browser,
- Can complement a stand-alone store - May require a commission on sales

 Community Provider – These are sites that create a digital online environment where
people with similar interests can transact, communicate, and receive interest-related
information. The revenue model is not well defined and typically relies on a hybrid
model. Examples include Wiserearth.com, Epinions.com and Oxygen.com.

ii Business-to-Business (B2B)
Business-to-Business (B2B) e-Commerce refers to electronic business transactions directly
between two or more companies, relating to the purchase and sale of goods and services. In other

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words, it involves electronic business transactions with other business(s), which typically takes
the form of automated processes between trading partners and is performed in higher volumes.
This is perhaps the largest form of e-Commerce based on the value and/or volume of
transactions. This is by far the most common type of e-Commerce generally managed by larger
companies that are supplying merchandise to smaller businesses who then sell to their customers.
Manufacturers, who
are selling in large quantities, are a good example of this.

2B can also encompass marketing activities between businesses, and not just the final
transactions that result from marketing, and also are used to identify sales transactions
between businesses.
B2B e-Commerce focuses more on creating highly efficient and transparent markets that would
transform the structure of industry value chains.
B2B activities includes portals that operate as online business marketplaces, portals, auction sites
exchanges as well as e-procurement, supply chain management, and trade opportunities for both
buyers and sellers. Benefits of eMarketplaces can include reduced costs, better research and
quicker transactions for buyers. Rewards for sellers include improved customer service levels
and cheaper products and services.

Small and medium-sized enterprises (SMEs) can benefit from business-to-business e-

Commerce as follows:
Purchasing Indirect Supplies: Indirect supplies, such as office furniture, pens, paper, and
general office equipment, are often a first step for smaller businesses to implement B2B e-
Commerce. Many suppliers offer catalogue-based websites for corporate purchases, and are
similar to buying online from a B2C website. Corporate accounts can be established online, and
organizations can save significant time and money on automating this purchasing process.

Purchasing Direct Materials: Direct materials are any products that go into the production of
your goods or services for sale. Establishing a relationship with a vendor that supports e-
procurement may reduce costs. Joining an e-marketplace and holding reverse auctions where
your suppliers bid on your requirements can lead to a real reduction in the overall cost of
manufacturing your product.

Selling Products or Services to New Vendors: By joining an e-marketplace you can open up
new opportunities to sell your products around the globe. While many private e-marketplaces are
restricted to vendors of the particular organization running the exchange, public hubs can allow
you to offer your services to all other participants. Hopefully the same e-marketplace where you
make purchases can be the same place where you sell your wares, thus increasing your reputation
as a valued member of the online community.

Leveraging Existing Web Presence: Greater sophistication can be programmed into existing
online store to target business clientele. This often includes adding account registration and per-
user price discounting, as well as possibly allowing for purchase orders as payment for corporate
clients. You should keep in mind that this additional functionality is not trivial, and could require
rebuilding your online store from the ground up at a significant cost.

54
Investing in E-Procurement Solution: If your business is a major consumer of various
suppliers, perhaps e-procurement will be an added value. With a manageable expenditure you
could realize a significant return on investment.

iii. Consumer-to-Consumer (C2C): This model provides a way for consumers to sell to each
other, with the help of an online market maker. It is an Internet-enabled form of historical
commerce in the form of barter, flea markets, swap meets, garage/yard sales and the like.In other
words, consumers sell directly to other consumers. It includes any website where people are
brought together to buy, sell, or trade. Online auction such as eBay.com is a perfect example of
this business model. Another good example will be Craig-List.com in the USA.

iv. Business-to-Government (B2G): As the name implies, there is a form of electronic

businesses transactions between businesses and the government. In other words, government
buys or provides goodsservices, or information to/from businesses or individual citizens. It may
also involve transactions regarding various business licensing, legislative issues or reporting
requirements.

v. Business to Employee (B2E): This is a model where information and services are made
available to employees online. For example, as in B2E portal, a company or organization Intranet
or Extranet can be customized for each employee. It includes specific information and
personalized data such as personal hyperlinks, stock quotes, sports scores and news clips. It
could even include a video feed to their children's day care center.

2. Business Models based on Technology Used

i.Peer-to-Peer (P2P): This model uses peer-to-peer network technology, which enables Internet
users to share files and computer resources without having to go through a central Web server.
Napster.com was one of the most well-known examples of P2P until they were put out of
business for copyright infringement. Other examples are MGM, Grokster.com, etc.

ii. Mobile commerce (M-commerce):In mobile commerce, wireless digital devices such as
cell phones and handheld devices are used to enable transactions on the Web. It takes traditional
e-Commerce business models and leverages emerging new wireless technologies. Key
technologies are telephone network based 3G; Wi-Fi; and Bluetooth. However, technology
platform continues to evolve .

Table 1. Summary of Major Types of E-Commerce Models

Major Types of e-Commerce

Types of E-commerce Example

B2C - Business to Customer Amazon.com is a general merchandise that sells
consumer products to retail consumers.
B2B – Business to Business Esteel.com is a steel industry exchange that creates an
electronic market for steel providers and users.
C2C – Customer to Customer Ebay.com creates a marketplace where consumers can
auction or sell goods directly to other consumers.

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 P2P – Peer to Peer Gnutella is a software application that permits
consumers to share music with one another directly,
without the intervention of a market maker as a CZC e-
commerce.
M-Commerce – Mobile Commerce Wireless mobile devices such as PDAs (Personal Digital
Assistant) or cell phones can be used to conduct
commercial transactions.
Source: E-commerce (business. technology. Society), 2ndEd., K. C. Laudon& C. G. Traver)
8. KEY TECHNOLOGIES ENABLING E-COMMERCE EVOLUTION
The widespread use of e-business or e-Commerce did not come by chance. Many factors
contributed to the advancement. It ranges from decreasing cost of increasingly more powerful
computer hardware such as processors, memory chips, drives and networks to advance software
programs. The convergence of technologies leading to the integration of voice, data, image,
video data also played a vital role. Without going into details, the e-Commerce
enablers are summarized in Table 2.

Table 2: E-Commerce Enablers

Infrastructure Players
Hardware: Web Servers IBM, HP/ Compaq, Dell, Sun
Software: Operating systems and server Microsoft, Red Hat, Linus, Sun, Apache
software software foundation
Networking Routers Cisco, Unsiphase, Lucent
Security Encryption Software VeriSign, Check point, PGP Corporation
E-commerce software systems (B2C, B2B) IBM, Microsoft, Commerce one, Ariba
Broad vision
Streaming media solutions Real Networks, Microsoft, Apple
Consumer relationship management software PeopleSoft, Siebel SAP
Payment Systems VeriSign, PayPal, Cybercash
Performance Enhancement Akamai, Cache Flow, InKtomi ,Cidera
Databases Orade, IBM, Microsoft, Sybase
Hosting Services Interland, IBM, Mebintettects
(Source: E-commerce (business. technology. Society), 2ndEd., K. C. Laudon& C. G. Traver)

9.DIMENSIONS OF E-BUSINESS
In this section, we examine different dimensions of businesses in relation to commerce. Based on
the above mentioned e-Commerce perspectives and the degree of digitization of product,
process, and the delivery agent, business can be classified as pure or partial e-Business/e-
Commerce. In traditional commerce, all dimensions are physical, which means that both buyer
and seller must meet at a specified physical location. On the other hand when all dimensions are
digital or electronic pure e-Commerce is obtained. This is depicted on the lower left hand side of
the exhibit 1.1 or Figure 3. Obviously, in partial e-Business/e-Commerce, all other possibilities
include a mix of digital and physical dimensions. Particularly in the developing countries, the
partial e-Business/e-Commerce has been adopted due to inadequate enabling environment (such
as a suitable infrastructure, policies, and financial resources).

10.E-COMMERCE AS DRIVER FOR SMALL BUSINESSES

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The need for micro- and small enterprises to consider adopting e-Commerce is driven by
global, regional and national business trends. This relates to markets, costs, new technologies
and political factors including:
Adaptation to rapid market changes that are impacting on export and domestic markets.
 Cost competition and the need to compete more effectively in both local and international
sectors.
Globalization of the production and supply of goods and services – and the need to integrate
small enterprises more effectively into the supply chains of larger businesses.
Increased customer expectations and consumer power – buyers expecting to be able to access
web-based information about products and services.
Adaptation to new technologies – an overall need for technological upgrading.
 Greater role for information in business and the need to access process and communicate it
efficiently and effectively.
Government deregulation and liberalization – lowering costs of access.
Bilateral and multilateral trade agreements – opening up markets to developing country
producers.
 Adaptation to higher quality standards such as ISO9000 – ICTs are acting as an enabler in this
area.

ADVANTAGES AND DISADVANTAGES OF E-COMMERCE

Modern e-Commerce/e-Business has been around since the mid-1990s, ever since the advent of
the World Wide Web. Now anyone can become a global seller of goods, services, and
information online. No longer do you need huge distribution networks and management teams to
run a successful business. We summarize below some of the well-known e-Commerce
advantages and disadvantages.

A. Advantages
i. Cost Reduction Benefits:
One of the greatest benefits of e-Commerce is cost reduction benefits. It is simply the most
cost effective way to open and run a business. E-Commerce business has far fewer overheads
than traditional brick and mortar business. The cost benefits include:

 Reduced cost of establishment: There is little cost associated with establishment of e-

commerce. Little rental expenses, employee costs, insurance, power, phone or any of the hundred
other bills that conventional store owners have to deal with on a regular basis.
Reduced Running Cost: Low running costs and time effective management are also benefits
of e-Commerce. In Figure 4, the grey area in the chart depicts the running costs for a typical e-
Commerce business, compared to the blue area for traditional brick and mortar store. These low
running costs mean a far bigger profit margin, while staying competitive. A medium sized E-
Commerce business can be run for $25 - $200 a month, while small to average sized brick and
mortar business will cost over $200 per square foot, per year in rent in major business districts.
When you start adding the other essential running costs involved with the brick and mortar
stores, the price of owning a business just keep increasing.
Reduced travel costs: By using a mobile phone, email and other ICTs enabled devices to
substitute for journeys, travel cost will be greatly reduced.

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Reduced cost of materials: More information means better choice of suppliers and more
competitive prices.
Reduced marketing and distribution costs: It is easier to market and distribute products and
services using e-Commerce. For example, publishing a brochure online can reach an unlimited
number of potential customers and allow for regular update.
Reduced sales costs: E-Commerce provides unprecedented opportunities for businesses to
reduce the costs of trade locally and across borders.

ii. Market Benefits:

Greater reach: A vital benefit of e-Commerce is access to global markets which enables
businesses to expand their reach. The Internet allows for unconstrained awareness, visibility and
opportunity for a business to promote its products and services (Senn, 2000). A web presence
can allow businesses to reach out to customers far beyond their immediate location, and is open
often 24 hours a day, every day. Time and distance are no longer a problem, since customers can
access product and services from anywhere in the world, whatever time zone they live in. An e-
Business doesn't need to close at the end of day! The potential reach of vast number of customers
is
illustrated in Figure 5.

Improved customer service and brand awareness: With e-Commerce businesses can
provide more responsive order taking and after-sales service to customers, and therefore lead to
increased customer loyalty. E-Commerce also offers new avenues of promotion for products and
services.
Increased market awareness: Businesses can become more aware of competition within their
market and more aware of market changes, which can lead to product/service innovation or
quality improvement.

iii. Increased Efficiency

 E-Commerce can provide substantial benefits to small enterprises via improved efficiencies
and raised revenues. E-Commerce not only reduces costs but it can also increase the speed of
buying and selling transactions. It enables a new way of working to emerge as businesses face
the future and embrace the new economy. E-Commerce enables businesses to gain access to
better quality information, and thus empowers them to take informed decisions in their
businesses.
 More efficient supply chain management: E-Commerce can eliminate the need for middlemen
leading to lower transaction costs (including marketing, sales, transaction processing), reduced
overhead, and reduced inventory and labor costs.
 Improved internal functions: Cutting down on meetings, improving the exchange of critical
knowledge, eliminating red tape, and streamlining communications. Reduction in routine
administrative tasks frees staff to focus on more strategic activities.
Improved processes of activity – Both efficiency and effectiveness can be improved across a
wide range of activities using e-Commerce – particularly internal and external communications
(including advocacy with donors, government, etc) and procurement.

iv. Better Service Delivery

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 With e-Commerce, a business will achieve improved accuracy, quality and time required for
updating and delivering information on products and/or services. E-Commerce necessitates
improved ease, speed and immediacy of customer ordering. With e-Commerce it is not necessary
to have vast quantities of stock. The store or business carries only what is needed or better yet,
carry none at all. Many suppliers will ship direct to the customers, meaning stocking the
merchandise is unnecessary.

v. Competitive Advantage:
 E-Commerce can give a competitive advantage if properly implemented. It can help strengthen
market position and open up new business opportunities with the potential of increased profits. It
can enhance market, industry or competitor intelligence acquired through information gathering
and research activities.

vi. Continuous Trading

a) This can be classified under market benefits. Online business gives you access to the largest
market available, with over 3 billion people currently connected and growing on a daily basis.
Access for customers to catalogues and services is on a 24 hours, 7 days a week basis. By
breaking the restraints of geographical boundaries, e-Commerce can be used to access the global
marketplace on a continuous basis. Huge difference is evident in the bar graph in Figure 5. With
such a huge customer base, the potential reach of vast number of people, is one of the greatest e-
Commerce advantages.

vii.Human Capital Development

E-Commerce can be used to improve business and organizational skills as well as technical skills
of the employee. The motivation and confidence of staff can be enhanced through e-Commerce
activities.
 With e-Commerce, information and knowledge capacity can be improved to support
marketing, communication and branding of products and services.

B. Disadvantages
As noted above, e-Commerce is generally presented in very positive terms but, along with the
potential benefits, come potential problems especially for developing countries. The few pitfalls
of going into e-Commerce are discussed below. They are the financial costs, the business
'opportunity costs' and the dangers of failure. These disadvantages are far less than the
advantages and most can be overcome.

i. Extra Cost
Developing e-Commerce for a business will most certainly require extra costs. Initial start-up
costs (investment in a computer, network connection, bandwidth, etc.) can be significant, and
there are additional running costs too. Even after start-up, e-Commerce activity will need to run
in parallel with existing business methods (if applicable). For example, enterprises will need to
continue to produce paper-based marketing material (brochures, stationery, leaflets, etc.) as well
as building up web presence. This will duplicate some activities adding to overall costs. These
costs are definite whereas the new revenue streams from e-Commerce are not, particularly given
the relatively lower numbers of people online and with credit cards in developing countries.

59
Hence, many small businesses may be skeptical about e-Commerce benefits, and should be
encouraged to approach it in the step-by-step manner.

ii. Risk of Failure

 Research has shown that any new business venture is likely to fail, unless careful steps were
taken to guide against it. As the dot.com boom and subsequent bust demonstrated, e-Commerce
ventures may be more likely to fail than conventional businesses. This emphasizes the
importance for small businesses to be careful and not throw all their eggs into the e-Commerce
basket. Failure can be avoided by first deciding not to adopt e-Commerce at all or by taking a
step-by-step approach that minimizes risk.

iii. Risk of Losing Focus

 For conventional businesses running brick & mortar store, it is important that online and
offline efforts are not in competition with each other within a business. In fact, for most large
and medium sized enterprises, offline activities (such as face-to-face meetings) will remain far
more important than online communication. In the long term, risks can be minimized through
effective integration of online and offline activities – using e-Commerce to complement existing
business processes. In the short and medium terms, there is a risk that a business could lose focus
of its true business
needs if e-Commerce is oversold. This has happened before during the dot.com boom in the late
1990s.

iv. Opportunity Cost

 With e-Commerce, there will be risks for businesses if e-Commerce does not take off as
anticipated. Also, there are other costs involved in building capacity in the business as it relates
to e-Commerce in various ways:
i. Knowledge: improving management and staff's knowledge about e-Commerce.
ii. Skills: gaining specific skills in using, advising and training on e-Commerce.
iii. Attitudes: developing positive but realistic attitudes towards e-Commerce among staff.
iv. Finance: affording the direct and ongoing costs of any investment in e-Commerce.

Risks of Ignoring e-Commerce

Technology and innovation are often described as the catalyst for change. Ignoring new
technology may have significant impact on the ways business is done in the future. For example,
having no website, or a badly designed or marketed website, may put a business at a
disadvantage compared with competitors. Over the medium and long term, unsuitable or
inadequate technology can mean that customers remain uninformed and therefore business
cannot compete effectively.
The real risk to small business is NOT getting involved. Not putting e-Business solutions into
place will force small businesses to face the real threat of declining business. Not having e-
Business in place will squeeze a business out of the supply chain by those who do business
online. Some large industry firms require their suppliers to be connected to their network. Most
importantly a business may not be able to keep up with competitors without the innovation that
comes with e-Business affecting costs, sales and eventually, revenue and profit. E-Commerce
offers great benefits to any economy. As it continues to gain acceptance in Nigeria, the initial
divide between Nigerian consumers and the rest of the global market will be bridged. Nigerian

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consumers will have direct contact with merchants of their choice, in any region of the world.
Nigerian businesses will also be able to take advantage of the global reach, to open new and
profitable markets for local goods and services, in the not-too-distant future.

There is no denying the fact that by facilitating the integration of Nigeria economy and society
with rest of the world, e-Commerce will flourish in Nigeria. Today all countries are working to
achieve structural reforms in society under the key paradigms of liberalization and globalization.
The nation’s competitive power will determine the trade and the nation’s strength in science and
technology will play an important role to dominate the trade. All organizations are making the
best use of digitalization and use of the Internet to achieve the desired goal. Computers and the
Internet are now increasingly widely used to function as part of the business. Transactions
conducted through the Internet will have enormous implications on the international
competitiveness of every nation, giving rise to new and exciting opportunities in both the
domestic and international arena.

vi. Sustainability
A business may be able to overcome initial investment, but it is sustainability in terms of
recurrent costs, required staffing and skills, maintenance and upkeep, that could become a pitfall.

Technology Phobia:
 The technology can be alien to owners or employees, especially those new to E-commerce.
Therefore all the normal fears and self-doubts of engaging in something new and unknown is a
disadvantage. Without the e-Commerce technology, businesses remain without the tools that
they need to compete effectively. Technology should be an enabler and not a driver for the
realization of benefits, and risks need to be assessed in terms of actual costs, opportunity costs,
and the dangers of failure.

TOPIC THREE
11. THE STATE OF E-COMMERCE IN NIGERIA
The Internet has brought about the emergence of virtual markets with four primary distinct
characteristics, which are real-time, shared, open and global. The growing rate of ICT
utilization particularly the Internet has influenced at an exponential rate, online interaction
and communication among the generality of the populace. The shortcomings notwithstanding,
most people are connected through their cell phones, home PCs, corporate access, and public
kiosks. The patronage of the Internet all over the world is monumental and has remained on the
increase from inception.

Despite the global reach of e-Commerce, not all countries have taken advantage of or benefited
from e-Commerce. For example, Nigeria is yet to harness the opportunities for optimal financial
gains. There is a big gap in Internet and e-Commerce adoption between the developed and
developing countries (Licker & Motts, 2000); thus creating a digital divide. Digital divide is
defined as the “differential capabilities of entire social (or regional) groups to access and utilize
electronic forms of knowledge” (Straub, 2003), segregating the ‘haves’ from the ‘have-nots’ in
the information society. One area where international digital divide is evident is in electronic
commerce. Examination of the major e-Commerce sites will highlightthis great divide and
inequality.

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The main obstacles that prevent developing countries, of which Nigeria is part, from
leveraging the internet are:
(1) lack of adequate infrastructure;
(2)lack of technical know-how;
(3) information processing about the economy;
(4) Lack of legal and regulatory framework; and
(5)The lack of adequate banking infrastructure is also considered as one of the problems
faced by developing countries in building e-Commerce solutions (Khalfan& Akbar, 2006).

Other factors affecting the adoption of e-Commerce in Nigeria could be classified under:
1. data security,
2. network reliability,
3. credit card threat,
4. authenticity,
5. citizen`s income and education, to mention few.

We will summarize the state of e-Commerce in Nigeria by presenting the SWOT Analysis.
Strengths: these indicate areas where drivers or enablers are strong in the country and/or where
constraints are being overcome:
 Growing competition plus other diffusion-friendly strategies and government policies to
develop ICT infrastructure,
 High ICT infrastructure investment and growth rates, including growth of mobile telephony,
 High growth of intermediated access to ICTs – e.g. via Internet cafés and telecentres plus
sharing of ICTs – so there can be many users per Internet-linked PC,
 Falling costs of many aspects of e-Commerce components including hardware and
telecommunications charges,
 Growing pool of ICT skills in the country as well as growing IT sector provides a foundation
for e-Commerce growth,
 Active promotion of e-Commerce specifically and ICT usage generally by government
agencies (new ministry of Communications Technology), NGOs and large private firms, and
Reasonable Western language proficiency in Nigeria.
Weaknesses: these indicate areas where constraints are still strong in the country and/or where
drivers and enablers are weak:
 Lack of nationally coordinated ICT infrastructure, knowledge and skills compared to
industrialized countries,
 Very uneven distribution of infrastructure in rural-urban terms,
 Uneven distribution of ICT access capacities between various social groups as well as in urban
and rural population,
 Large proportion of mobile phones are not Internet-capable,
 Poor Western language skills and/or lack of support for ICT usage in local languages,
 High cost of ICT usage relative to costs in industrialized countries,
 Lack of large mass of local customers using or with potential to use e-Commerce,
 Lack of e-Commerce awareness and skills among entrepreneurs, and among support staff,
 Absence of an 'e-Commerce culture', e.g. dislike of operational transparency, and preference
for personal contact in commerce,

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 Poor financial and logistics infrastructure to support secure online payment and e-Commerce
fulfillment,
 Poor ICT reliability and security combined with relatively slow-speed,
 Limited export-orientation and export-capability among MSEs,
 Lack of support to MSE innovation by local financial institutions, and
 No current legal and regulatory frameworks for e-Commerce Opportunities: local, regional or
global opportunities that are or may be available to e-Commerce-enabled MSEs:
 Primary product export sectors such as agriculture, horticulture, fisheries, forestry and
mining products.
Manufactured exports.
 IT-based services that are readily traded over the Internet such as software, data entry, call
centre operations, etc.
Tourism and travel-related sectors.
 "Traditional" sectors with export market appeal such as handicrafts, textiles, art, natural
medicines, etc.
 Fair traded goods, which are often sold via the Web in Western markets.
Growing opportunity to leverage low labour costs.
 Strengthening local supply chains and driving down input prices.
 Main export markets are OECD nations with already high levels of e-Commerce.
 Main opportunities in early steps of e-Commerce including online ordering but offline
payment,
 Large and young population profile, who may more-readily take to e-Commerce,
Domestic use of e-Commerce using mobile networks and communications ('m-Commerce').
Diffusion of new generations of Internet-capable mobile phones.
Plenty of 'virgin' markets providing opportunities for e-Commerce first movers.
Improved processes and products/services through closer interaction with customers. Threats:
risks that face MSEs in the country specifically due to growth of e-Commerce:
Competition and penetration of local or existing export markets by e-Commerce-Capable
overseas firms.
Growth of larger firms able to invest more in e-Commerce at the expense of MSEs.
Increased disparities between few early adopters of e-Commerce and many 'laggards'.
Increased disparities between urban and rural areas.
Wasted investments in e-Commerce by early adopters.
 Growing automation leading to loss of low labour cost advantages.

12.STEPS TO STARTING E-COMMERCE BUSINESS

Information in this section is from “E-Business Overview, by The Business Link , a not-for-
profit organization supported by the Governments of Canada and Alberta This section outlines
the 'steps to e-Commerce' describing the differing stages of e-Commerce development that you
may find in a small enterprise. It does this through a model and then presentation of six real-life
case studies of small enterprises using e-Commerce. The case studies show how enterprises are
benefiting from e-Commerce, as well as some of thepitfalls. The 'steps' model can help you
understand the different types of e-Commerce business applications you may encounter. It may
also help in identifying the types of assistance needed for small enterprises.

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Step 1. Starting Out: Simple messaging using mobile communications
The simplest application of e-Commerce is short messaging services (SMS), which provides
a cheap and widely available option for enterprises. Mobile phones offer a number of key
advantages over fixed line communications for small businesses – such as instant
communications with customers and suppliers, even when on the move. They also provide
greater connectivity and network coverage than landlines – users can be instantly connected
by text messages and mobile chat – a powerful marketing and advertising tool.

Step 2. Getting Online: Email messaging

Businesses can send or receive emails from a computer terminal either located on your
business premises or via a facilitator (such as an Internet café or telecentre). Email is a cheap,
quick and reliable way to exchange business information with customers, suppliers, and
business contacts that are also connected to email. A variety of information can be sent – not
just messages, but documents, photographs, drawings, or any other computer data file.

Figure 6. Steps to e-Commerce

Step 3. Web Publishing
Enterprise information can be made available by using an online brochure in the form of web
publishing, for example. Its simplest form may consist of multiple page website giving a basic
business profile, some information about products and services, and contact information
such as physical and postal address, telephone and fax, and email contact. Additional
information may include an online catalogue – an online version of a conventional catalogue
that can be easily updated. Even a simple web presence offers the ability to access a wide –
potentially global – market with 24/7 accessibility.

Step 4. Web Interacting

Web interaction will allow customers, and suppliers more scope to browse through images,
descriptions and specifications relating to products and services. Customers may submit email
enquiry forms, order online, use online services or use a shopping cart facility and order
confirmation – that could be paid for and delivered offline. Interaction over the web can improve
customer service and response to customer queries.

Step 5. Web Transacting

Web transactions is like having a full e-Commerce capability that covers the whole transaction
process from the placing of an order to online payment for goods and services via secure
networks. For B2C e-Commerce, this involves making use of secure credit card payment
systems, and for B2B e-Commerce, it involves payment through secure banking systems.

Step 6. Web Integration

E-Commerce may also take on a wider role within a business through web integration. Web
integration provides an electronic platform that links customer-facing processes such as sales
and marketing (the "front office") with internal processes such as accounts, inventory control
and purchasing (the "back office"). This means that the business is becoming fully "e-enabled".
E-Business links internal systems with external networks (customers, suppliers and
collaborators) via the Internet. Integrating systems can make it easier and cheaper to do business,
and it can encourage customer loyalty and repeat business.

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 MODULE 6
ETHICS AND SOCIAL RESPONSIBILITY

Learning Outcomes
Upon the completion of this module, the learner would have:

of ethics in business;

Content
a. The concepts of business ethics and social responsibility.
b. Ethical principles for entrepreneurs.
c. Importance of ethics in business.
d. Application of business ethics and social responsibility to the operations and success of
ventures.
e. Social responsibility among business organizations in Nigeria.

Concepts of Business Ethics and Social Responsibility

Ethics, in the simplest term, involves learning what is right or wrong. When this word is applied
to the world of business it is called business ethics. Simply put, business ethics involves knowing
what is right or wrong in a business environment and doing what is right with regard to effects of
products or services and in relationships with stakeholders (Gebler, 2012). Business ethics is the
applied ethics discipline that addresses the moral features of commercial activity. According to
Wikipedia (2012a), business ethics otherwise referred to as corporate ethics represent a form of
applied ethics or professional ethics that examines ethical problems that arise in a business
environment. It applies to all aspects of business conduct. The range and quality of business
ethical issues reflect the interactions of profit – maximizing behaviour with non-economic
concerns. Business ethics and the resulting behaviour are in state of constant evolution. It is a
form of applied ethics that examines just rules and principles within a commercial context, the
various moral or ethical problems that can arise in a business setting and any special duties or
obligations that apply to persons who are engaged in commerce. Generally speaking, business
ethics is a normative discipline whereby particular ethical standards are advocated and then
applied (Tabije, 2012).

On the other hand, social responsibility is an aspect of business ethics concerned with the need
for business to try and serve their local community and help its employees lead better life. Social
responsibility requires that the entrepreneur looks beyond making profits alone but pays attention
also to how to relate with the host community of his venture and his employees in a way that
promotes good will. This may take the form of sinking water borehole within the company’s
premises and extending the taps outside the walls of the company so that members of the
community can source their drinking water there from.
According to Uadiale and Fagbemi (2011), corporate social responsibility (CSR) is a strategy for
demonstrating good faith, social legitimacy, and a commitment that goes beyond the financial
bottom line. This definition appears to be further amplified by Yusuf (2012) in his description of

65
the concept of CSR. According to him, CSR is a form of self-regulation, conscious attempts and
self-efforts undertaken by organizations for self-preservation and enhancement of their
operations. CSR, according to him, is usually integrated into a business model for an
organization to be able to live in harmony with its operating environment. Yusuf further
explained that CSR policy functions as a built-in, self-regulating mechanism for a business entity
to monitor and ensure its adherence to laws, ethical standards, and norms and nuances of its
environment. CSR when proactively undertaken promotes the public interest by encouraging
community growth and development, and by voluntarily eliminating practices that harm the
public sphere, regardless of legality. It is the deliberate inclusion of public interest into corporate
decision-making and the honouring of a triple bottom line known as People, Planet and Profit
(Yusuf, 2012).

In a nutshell, social responsibility otherwise referred to as corporate social responsibility (CSR)

is a mode of ethics that implores the entrepreneur to act in a way to benefit society (Pairier,
2012). It is a subcategory of business ethics. Entrepreneurs who adhere to the principles of social
responsibility make business related decisions based on the principle that the best decision is the
one that will do the most for the community hosting their ventures and the society at large even if
that means sacrificing their own personal wants and/or needs. The goal of CSR is to embrace
responsibility for the company’s actions and encourage a positive impact through its activities on
the environment, consumers, employees, communities, stakeholders, and all other members of
the public sphere who may also be considered as stakeholders (Wikipedia, 2012b).

Features of Business Ethics

The following are the features of business ethics as identified by Akrani (2011):
1. Code of conduct: Business ethics is a code of conduct. It tells what to do and what not to do
for the welfare of the society.
2. Based on moral and social values: Business ethics is based on moral and social values. It
contains moral and social principles (rules) for doing business. This includes
self-control, consumer protection and welfare, service to society and fair treatment to social
groups amongst others.
3. Gives protection to social groups: Business ethics give protection to different social groups
such as consumers, employees, small businessmen, government, shareholders, creditors, etc.
4. Provides basic framework: Business ethics provide a basic framework for doing business. It
gives the socio-cultural, economic, legal and other limits of business. Business must be
conducted within these limits.
5. Voluntary: Business ethics must be voluntary. The businessmen must accept business ethics
on their own. Business ethics must be like self-discipline. It must not be enforced by law.
6. Requires education and guidance: Businessmen must be given proper education and guidance
before introducing business ethics. The businessmen must be motivated to use business ethics.
They must be informed about the advantages of using business ethics. Trade Associations and
Chambers of Commerce must also play an active role in this matter.
7. Relative Term: Business ethics is a relative term. That is, it changes from one business to
another. It also changes from one country to another. What is considered as good in one country
may be taboo in another country.

The Need for Business Ethics

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The points below discuss the need for ethics in business:
1. Stop business malpractices: Some businessmen engage in business malpractices by indulging
in unfair trade practices like black-marketing, artificial high pricing, adulteration, cheating in
weights and measures, selling of duplicate and harmful products, hoarding, etc. These business
malpractices are harmful to the consumers. Business ethics help to stop these business
malpractices.
2. Improve customers' confidence: Business ethics are needed to improve the customers'
confidence about the quality, quantity, price, etc. of the products. The customers have more trust
and confidence in the businessmen who follow ethical rules.
3. Survival of business: Business ethics are needed for the survival of business. The businessmen
who do not follow it will have short-term success, but they will fail in the long run when
discovered by the customers.
4. Protecting employees and shareholders: Business ethics are required to protect the interest of
employees, shareholders, competitors, dealers, suppliers, etc. It protects them from exploitation
through unfair trade practices.
5. Develops good relations: Business ethics are important to develop good and friendly relations
between business and society.
6. Creates good image: Business ethics create a good image for the business and businessmen. If
the businessmen follow all ethical rules, then they will be fully accepted and not criticized by the
society. The society will always support those businessmen who follow this necessary code of
conduct.
7. Smooth functioning: If the business follows all the business ethics, then there will be absence
of disruption in the relationship among employees, shareholders, consumers, dealers and
suppliers. This will result in smooth functioning of the business. So, the business will grow,
expand and diversify easily and quickly. It will have more sales and more profits.
8. Consumer satisfaction: Today, the consumer is the king of the market. Any business simply
cannot survive without the consumers. Therefore, the main aim or objective of business is
consumer satisfaction. If the consumer is not satisfied, then there will be no sales and thus no
profits too. Consumer will be satisfied only if the business follows all the business ethics.
9. Importance of labour: Labour, i.e. employees or workers play a very crucial role in the success
of a business. Therefore, business must use business ethics while dealing with the employees.
The business must give them proper wages and salaries and provide them with better working
conditions. The employees must also be given proper welfare facilities.
10. Healthy competition: The business must use business ethics while dealing with the
competitors. They must have healthy competition with the competitors. They must not do cut-
throat competition. Similarly, they must give equal opportunities to small-scale business.

Ethical Principles for Entrepreneurs

Ethical Principles are ethical values translated into active language establishing standards or
rules describing the kind of behavior on ethical person should and should not engage in
(Josephson Institute, 2010). The following principle represents the kind of behaviours expected
from every ethical entrepreneur (business executive) as presented by Josephson Institute (2010).
1. Honesty: The virtues of honesty and truthfulness are the hallmark of ethical executives. Such
entrepreneurs do not deliberately mislead or deceive others by misrepresentations, over-
statements, partial truths, selective omissions, or any other means.

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2. Integrity: In a nutshell, ethical entrepreneurs are principled, honourable and upright. They
courageously fight for their beliefs. They exhibit personal integrity and the courage of their
convictions by doing what they consider to be right even in the face of pressure to do otherwise.
3. Promise-keeping and trustworthiness: Ethical entrepreneurs make a very reasonable effort
to fulfill the letter and spirit of their promises and commitments. They are trustworthy. They call
a spade by its name. They do not interpret agreements in an unreasonably technical or legalistic
manner as a means of rationalizing non-compliance, or creating justifications for escaping their
commitments.
4. Loyalty: Ethical entrepreneurs are ever loyal to persons in their business organization and the
organization they are working for. They demonstrate friendship in adversity, and support and
devotion to duty. They do not divulge confidential information no matter what they personally
stand to gain by so doing. Such executives ensure they do not compromise their right to
independent professional judgment by guarding against undue influences and conflict of interest.
They cannot accept another employment without providing reasonable notice to their former
employer. They will ever refuse to seek cheap popularity with their new organization through
castigation of their former employers or engaging in any activities that take undue advantage of
their previous positions.
5. Fairness: Ethical entrepreneurs are fair, just, and treat individuals equally. They tolerate and
accept diversity, are willing to admit they are wrong and, where appropriate, are to change their
positions and beliefs. They do not exercise power arbitrarily, and neither use overreaching nor
indecent means to gain or maintain any advantage. They do not take undue advantage of
another’s mistakes or difficulties.
6. Concern for Others: Ethical entrepreneurs strive to achieve their business objectives in a
manner that causes the least harm and the greatest positive good. They treat others the way they
would like to be treated. They are caring compassionate, benevolent and kind.
7. Respect for Others: One of the traits of ethical entrepreneurs is respect for others. They show
great respect for the human dignity, autonomy, privacy, rights and interests of all stakeholders in
their decisions. They are imbued with the sense of courtesy. They treat all persons with equal
respect and dignity irrespective of gender, race, socio -economic status and race.
8. Law abiding: Ethical entrepreneurs meticulously abide by laws, rules and regulations guiding
their business activities.
9. Commitment to Excellence: Ethical entrepreneurs are sticklers to excellence. In the
performance of their duties they are informed and prepared and always striving to increase their
proficiency in all areas of responsibility.
10. Leadership: Ethical entrepreneurs appreciate the responsibilities and opportunities of their
position of leadership. In keeping with this they strive to be positive role models by their own
conduct and by helping to create an environment in which principled reasoning and ethical
decision making are highly prized.
11. Reputation and morale: Ethical entrepreneurs appreciate the need to maintain their
organizations’ good reputation while at the same time building the morale of their employees.
They do these by engaging in no conduct that might undermine respect and taking whatever
actions are necessary to correct or prevent inappropriate conduct of others.
12. Accountability: Ethical entrepreneurs are willing to be held accountable for the ethical
quality of their decisions and omissions to themselves, their colleagues, their companies, and
their communities.

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Importance of Ethics in Business
The importance of ethics in business cannot be overemphasized. The importance are as follows:
1. Provision of moral compass
During times of fundamental change, values that were previously taken for granted tend to be
strongly questioned. Many of such values are no longer adhered to. Leaders and staff at such
periods are left with no clear moral compass to guide them through complex dilemmas about
what is right or wrong in the business environment. It is at such moments of crises and confusion
that the beauty of business ethics manifests since the ethics provide them with the moral compass
to navigate the troubled times.
2. Ethics implicitly regulate area and details of behaviour that lie beyond governmental
control. This is necessary because much as governments use laws and regulations to point
business behaviour in what they perceive to be beneficial directions, not all areas and details of
business lie within such controls. For example, governments may establish minimum wage but
how much a worker is paid beyond the minimum wage is expected to be addressed by business
ethics.
3. To meet stakeholder’s expectation
Stakeholders have the right to expect a business to be ethical. If business has no ethical
obligation, other institutions could make the same claim which would be counterproductive to
the corporation (Duska, 2007).
4. Definition of the rights and duties between a company and significant others.
Business ethics help to define the rights and duties between a company and its employees,
suppliers, customers and neighbours. They also help to define the company’s fiduciary
responsibility to its shareholders (where applicable) as well as how companies should relate to
other companies or business ventures.

5. Enhancement of business performance

Studies have shown that good CSR correlates positively with good business performance in the
long run. It must be noted that CSR is an aspect of business ethics hence this positive correlation
is seen as one between business ethics and performance.
6. Others
Other values accruing firm business ethics in general and CSR in particular include the following
identified by Akinjide – Balogun (2001).
– term shareholder value, corporate financial stability and sustainability.

-regulation and deterring government regulatory intervention; and

Application of Business Ethics and Social Responsibilities to the Operations and Success of
Ventures.
In general, business ethics and social responsibility find their respective application in day –to-
day operations of ventures. With regard to business ethics, the need arises daily for the
entrepreneur to make specific judgments about what is right or wrong; what ought to be done and
what ought not to be done. These decisions call for action based on ethical principles of the
venture as well as those of the entrepreneur involved. Sometimes, the scenario may not just be as
simple as deciding on what is right or wrong. It could take such complexity as in the case of
deciding on situations where there may be conflict between the interests of the employee, the

69
commercial enterprise, and society as a whole. In this case, serving the interest of one party may
be detrimental to the other(s). For example, the entrepreneur’s decision may be good for the
venture and probably the employees but against the welfare of the larger society and vice versa.
It is at such points as above that business ethics are fallen back on to harmonize and reconcile
conflicting interests.
Furthermore, ethical issues can arise when business ventures have to generate and succeed in an
environment with conflicting legal or cultural standards. For example an entrepreneur may be
operating a business venture in a part of the country where child labour is an acceptable practice
as opposed to the situation in the entrepreneur’s home state or region where such practice is
abhorred. The question in this case may be which of the two divergent cultures the entrepreneur
would subscribe to for the business to be successful. This again is a matter to be resolved with
predetermined business ethics.

In the same token as above, social responsibility may be applied by the entrepreneur to
successfully operate his /her business venture. A number of approaches are available for the
entrepreneur who wishes to operate his/her venture to apply CSR. These include philanthropy,
incorporating the CSR strategy directly into the business strategy of his/her organization, and
creating shared value (CSV).
The philanthropy approach involves monetary donations and aid given to local organizations and
impoverished communities. However, this seems to breed dependence hence its modification
often times to community development helps in which the donor partners with the host
community to plan, implement, monitor and evaluate projects capable of developing the
community’s human resources.

Incorporating the CSR into the company’s business strategy may take the form of keeping a
policy that makes the business venture source certain cadres of its manpower from the host
community. This creates a commensally relationship between the business venture and the host
community.
The last but not the least approach is the CSV. The shared value model is based on the idea that
corporate success and social welfare are interdependent. This approach appreciates the need to
invest in developing local manpower through scholarship schemes with a view to creating an
informed citizenry capable of enthroning good governance needed for the successful operation of
their ventures.
Social Responsibility among Business Organizations in Nigeria
CSR among business organizations in Nigeria can be assessed across all cadres of business in
Nigeria ranging from the small, micro, and medium to large business enterprises. However for
the purpose of this discourse, let us focus on the large-scale business enterprises. Within this are
the companies operating in the Nigerian oil sector, the banking sector, and the manufacturing
sector.
The most active sector in Nigeria is the oil industry. Over 70 per cent of Nigeria’s revenue comes
from this sector. The sector has such big players as Shell, Chevron –Texaco, Exxon Mobil, Total
Elf, among others. The age long struggle by the Niger Delta people which produced scores of
militant groups agitating for social responsibility from the oil giants operating in their areas
speaks volume of their CSR failure.

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The above, however, does not suggest that the oil companies are doing nothing regarding CSR.
The truth however is that a few things they are currently doing do not yet add up to what they
could have done were they operating in their parent countries. A few instances of CSR from the
oil sector have been documented.
Tuodolo (2009) observed that Shell. ENI, EXXonMobil, Chevron Texaco, Total FinaEIF and
other oil transnational corporations (TNCs) are contributing to economic growth and
development through community development programmes in health, education, transportation
and agriculture amongst others in local communities.

Among the TNCs operating in the oil sector of Nigeria, Shell cannot easily be ignored hence we
will try to use their CSR in Nigeria to highlight the CSR practices in this sector in Nigeria. Shell
has the largest area of operation in Nigeria and accounts for about half of the total oil production
in Nigeria (Tuodolo, 2009). Perhaps the greatest evidence of Shell’s CSR activities is in its
community development programmes in the local communities. Through the community
development programmes, Shell contributes to the development of education. It does so by
awarding primary, post –primary, and university scholarships to local people, building
classrooms, providing equipment and sometimes paying the allowance of post-primary school
teachers. The corporation also provides or sponsors training in such basic skills as craftsmanship,
joinery, mechanics and tailoring for some communities.

Shell also plays active role in such other areas as transportation, road construction, building of
jetties, donation of speed boats and cars, agriculture, micro credit schemes for farmers, and
donation of farming equipment to local communities. Others include training of farmers,
electricity, and donation of power plants, supply of diesel and sinking of water boreholes
amongst others. Be these as they may be however, there still remains a sore point in Shell’s CSR
practice in the Niger Delta. This is her failure to play by the rules in areas of environmental
protection. The case of the Ogoni people that culminate in the death of the playwright Ken
SaroWiwa and others comes to the fore. Till date, the people of the Niger Delta pays the cost of
environmental degradation in return to the above community development aid offered by Shell
and other TNCs involved in the oil sector.

The case of the Nigerian banking sector appears to be different. There has always existed a
symbiotic relationship between Nigerian banks and the society over the years (Ademosu, 2008).
Banks in Nigeria perceive and practice CSR as a corporate philanthropy aimed at addressing
socio-economic development challenges (Amaeshi, Ogbechi, Amao, &Adi 2006). Even without
having any social responsibility objectives enshrined in their corporate philosophy, most banks
have demonstrated understanding in their practices, behaviors and operations (Nwankwo, 1990).

References
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Akrani, G. (2011). What are Business Ethics? Meaning Definition Features.Retrieved from

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http://kalyan-city.blogspot.com/2011/09/what-are-business-ethics-meaning.html August, 2012.
Akrani, G. (2011). The Need or Importance of Business Ethics.Retreived from http://kalyan-
city.blogspot.com/2011/09/need-or-importance-of-business-ethics.html August, 2012.
Akinjide-Balogun, O. (2001). Nigeria: Corporate Social Responsibility. Retrieved from
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Gebler, D. (2012) Business Ethics and social Responsibility
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Josephson Institute (2010). Ethical Principles for Business Executives.
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Nwankwo, G. (1990) .Bank Management: Principles and Practice. Cited by E.A. Ademosu
(2005). Corporate Social Responsibility:The Experience of the Nigeria Banking System. A paper
delivered at the 2008 conference of the Federation of African Public Relations Associations held
in Ghana. Pairier, A. (20212).Difference between social responsibility and ethics.Retrieved from
eHow, March 23, 2012.
Tabije, I. (2011). Business Ethics and Social Responsibility.Business Ethics Review.Retrieved
from WordPress.com, March 23, 2012
Tuodolo, F. (2009). Corporate Social Responsibility: Between civil society and the oil industry
.An International E-Journal for Critical Geographies, 8 (3), 530-541.
Uadiale, O. M. Fagbemi, T.O. (2011). Corporate Social Responsibility and Financial
Performance in Developing Economies: The Nigerian Experience. The 2011 New Orleans
International Academic Conference, New Orleans, Louisiana, USA..Retrieved from
conferences.online.com, March 23, 2012.
Wikipedia (2012a).Business Ethics .Retrieved from
http://en.wikipedia.org/wiki/business_ethics, March 17, 2012.
Wikipedia (2012b).Corporate Social Responsibility.Retrieved from Wikipedia, March 23, 2012.
Yusuf, F.A.O. (2012). Corporate Social Responsibility in Nigeria.Retrieved from
http://www.ibanet.org, March 23, 2012.

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 MODULE 7
MANAGING TRANSITION: FROM START UP TO GROWTH

LEARNING OUTCOMES:
Upon completion of this module, students would have been able to:
1. Define business transition, understand the issue of phases and growth stages of transition in
business as well as know how to manage transition from a business start-up to growth.
2. Explore issues related to planning and decision making in transition situation
3. Understand the issue of business control
4. Know personal discipline in managing a business from start-up to growth
5. Discuss the stress and pressures and how to avoid them in transitions.

CONTENT:
1. Business transition, phases and growth stages of transition in business and managing transition
from a business start-up to growth.
2. Planning and decision making in transition situation
3. Business control
4. Personal discipline in managing a business from start-up to growth.
5. Stress and pressures in business transition.

RATIONALE
Business transition is the process in which a business organization changes from one state to
another. It's not the failure to identify change that hurts organizations, but it is the failure to
implement change and implementing change is transition. The number one reason why most
businesses (small and large) are failing today is that they did not recognize the need for effective
transition management. An understanding of the phases of business growth and the models of
managing transition will help the entrepreneur to avoid some pitfalls in growing his business.
Managing transition in business from start up to growth has so many elements involved such as
planning, decision making, business control, self-discipline, handling stress and pressures. The
entrepreneur/manager will have to be self - disciplined to ensure his/her thoughts are translated
to actions. This could be done by adopting an effective decision-making process, planning and
implementation of the plan to ensure a successful transition. The entrepreneur should have a
transition team and carry all the stakeholders along. This will greatly reduce stress and pressures
which affect the nervous system causing various body organs to slow down or result in stress-
related ailments.

ACTIVITIES
At the end of this module the students should be able to:
a) Discuss the phases and stages of business growth
b) Debate the best transition models to be adopted by businesses in the Nigerian economy.
c) Present group discussions on the pitfalls of business growth in Nigeria
d) Identify critical success factors in planning for a successful transition
e) Identify areas in their life that require self- discipline, if they should assume the positions of
entrepreneurs and
f) Draft a good strategy for managing business transition.

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TOPIC: MANAGING TRANSITION IN BUSINESS: PHASES AND STAGES OF
GROWTH
INTRODUCTION:
In business, change is the way things will be different, and transition is how you move people
through the stages to make change work. Efforts at leading change, however, can be serious, if
not outright disastrous, unless the entrepreneurs manage transition. Yet managing transition well
is often the most neglected part of a change initiative (Stevens, 2008).
Entrepreneurs manage business transitions from one state to another in one or two basic ways,
either the business transforms itself i.e. do things differently, or it can replicate its existing
routines, processes and actions. The steps involved are identifying the needs, setting up the
transition team, laying out the plan, getting inputs from stakeholders, finalising the plan, clearing
the path and marking the progress of the transition by milestones. The managers should
recognise that challenges might arise in the process of transition and the same should be resolved
to ensure success.

TRANSITION IN BUSINESS AND PHASES OF BUSINESS GROWTH

The Phases of Business Growth
Most people agree that organizations have a life cycle; that, like people, businesses pass through
some identifiable stages. Some authors have identified four stages, some five, some six while
some seven. In spite of disagreement in number, the important thing is that all authors agree that
movement from one stage to the next must be managed. Failure to do this might lead inevitably
to the demise of the business.
Michael Masterson (Ready Fire Aim Book), proposed four (4) stages of business growth: start-
up/infancy, fast growth/childhood, adolescent and maturity. While Larry E. Greiner originally
proposed the Greiner Curve in 1972 with five phases of growth. Later, he added a sixth phase
(Harvard Business Review, 1998). The six growth phases are: growth through creativity, growth
through direction, growth through delegation, growth through coordination and monitoring,
growth through collaboration and growth through extra-organizational solutions. A combination
of the works of these two authors gives a better understanding in the phases of business growth.

Phase one: Start up/infancy (growth through creativity)

An overview for this phase is that the entrepreneurs who founded the firm are busy creating
products and opening up markets. There aren't many staff, so informal communication works
fine, and rewards for long hours are probably through profit share or stock options. However, as
more staff join, production expands and capital is injected, there's a need for more formal
communication. This phase ends with a Leadership Crisis, where professional management is
needed. The founders may change their style and take on this role, but often someone new will
be brought in.

Major functions of a Start-up Entrepreneur:

1. Mentoring and Being Mentored- Attend seminars, read books, and take advice from successful
people in the industry or a related-industry

74
2. Teaching everything he knows to his employees that will make the business to grow
3. Setting business targets - for him and his employees who should be focused on increasing his
customer base and improving the quality of customer service.
To transit from start up to growth, the entrepreneur must:
i. be flexible- for instance, flexible to try different marketing strategy;
ii. ask for advice from smart people;
iii. make sales his top priority; and
iv. discover their optimum selling strategy- this might be a combination of media, pricing and
quality.

Basic challenges of Start-up phase: Completing a sound business plan; pitching the business
plan with confidence to people who can help; finding the first customers; having a team that
work together well; delays in processing intellectual property protection claims; managing cash
flow effectively; finding the funding required for your business start-up costs; insufficient cash;
creating a business not a job; gaining marketplace acceptance and support – from your family,
friends and customers.

Phase two: Fast growth/childhood (growth through direction)

An overview for this phase is that growth continues in an environment of more formal
communications, budgets and focus on separate activities like marketing and production.
Incentive schemes replace stock as a financial reward. However, there comes a point when the
products and processes become so numerous that there are not enough hours in the day for one
person to manage them all, and he or she can't possibly know as much about all these products or
services as those lower down the hierarchy. This phase ends with an Autonomy Crisis: new
structures based on delegation are called for. The fast growth/childhood phase of business is
characterized by an increase in employee size and income. The main task should be on
aggressive proliferation of new products or goods and services. The manager/entrepreneur is to
focus on how to double the business revenue.
How to manage fast growth/childhood and double business revenue:
1. Create new adaptations of products/services that customers already know and love
2. Work hard
3. Work with smart people
4. Find a productive way to engage your employees so that you become a group that reproduces
great products/services
5. Increase the speed in the delivery of goods and services

Formula for Creative Brainstorming:

1. Have a team of 3-8 persons
2. Have a limited amount of time (1-3 hours)
3. Have an agenda/goals and objectives
4. Let everyone contribute
5. Have strict rules- such as time limit for each contribution, no specific criticism, be positive
6. Encourage a culture of creativity in solving problems

Basic challenges for fast growth/childhood phase: Having the discipline to maintain a narrow
strategic focus; transitioning from owner to leader; confronting future growth; managing cash

75
flow effectively; founder conflicts on roles and tasks; sticking to product schedules; building and
growing a customer base; having the right business leadership skills; and getting overwhelmed
by growth.

Phase three: Adolescent (growth through delegation)

Phase 3 of business growth is the Adolescent phase. This is characterized by more employees
and revenue. The focus of the Entrepreneur is fostering growth through delegation.
Functions of the Entrepreneur:
1. Create an organizational chart or a corporate structure for the organization
2. Spend more time with the marketing manager and less time with others like 80% to 20%
3. Explain business objectives to the corporate managers, draft a report format and meet with
each one every week

Figure 1: An Example of Organizational Chart

CEO/ Founder
Profit Manager
Controller of Operations
MM SM HP AM CSM DSM, FM ICTM
Source: Michael Masterson (year)
Basic challenges for Adolescent phase are: Evolving from being a manager of employees to a
manager of managers; insufficient cash; keeping communications open; managing customers’
expectations; delay in milestones delivery and running out of funds.

Phase four: Maturity (growth through coordination and monitoring)

An overview for this phase is that growth continues with the previously isolated business units
re-organized into product groups or service practices. Investment finance is allocated centrally
and managed according to Return on Investment (ROI) and not just profits. Incentives are shared
through company-wide profit share schemes aligned to corporate goals. Eventually, though,
work becomes submerged under increasing amounts of bureaucracy, and growth may become
stifled. This phase ends on a Red-Tape Crisis: A new culture and structure must be introduced
(see Figure 2).

Figure 2: The “Greiner Curve” ...(Source: Mind Table Ltd, 1996 – 2012)
This is the maturity phase. It is characterized by large number of employees. The opportunities
of Phase 4 business include selling your business privately, and taking your business public.

Roles of an Entrepreneur:
1. Employee- contribute positively
2. Manager- develop procedures to get work done, supervision etc.
3. Business builder- articulate values, philosophy and vision, supervision
4. Wealth builder- determines what the company is worth and what to do to increase its worth.

Basic challenges for Maturity phase: choosing right kind of investors; managing customers’
expectations and bureaucracy- team conflict.

Phase 5: Growth through collaboration

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The formal controls of phases 2-4 are replaced by professional good sense as staff group and re-
group flexibly in teams to deliver projects in a matrix structure supported by sophisticated
information systems and team-based financial rewards. This phase ends with a crisis of Internal
Growth. Further growth can only come by developing partnerships with complementary
organizations.

Phase 6: Growth through extra-organizational solutions

Greiner's recently added sixth phase suggests that growth may continue through merger,
outsourcing, networks and other solutions involving other companies. Growth rates will vary
between and even within phases. The duration of each phase depends almost totally on the rate
of growth of the market in which the organization operates. The longer a phase lasts, though, the
harder it will be to implement a transition.

Difference between change and transition in business

It is important to note that there is a difference between change and transition.
Change is an observable event that often occurs very quickly – e.g. you get a major promotion
to a new level of responsibility. Transitions are challenging due to the amount of energy it takes
to learn new behaviours and make emotional re-adjustments (Stevens, 2008).
Transition is defined as the process in which something changes from one state to another
(Collins Cobuild English Dictionary). Real change is about doing something about it. It is not the
failure to identify change that hurts organizations. It is the failure to implement change that hurts
organizations. And implementing change is a transition.
-going process.
takes place
inside of people.

there and how we will manage things while we are en route. Getting people through the
transition is essential if the change is actually to work as planned.

Transition in Business: Churchill and Lewis’ Entrepreneurial Growth Stages

The concept of Churchill and Lewis’ Entrepreneurial Growth Stages reveals that successful,
large organizations do not “materialize” out of thin air, they begin as entrepreneurial firms.
Transitioning from an entrepreneurial to a larger organization is challenging to both the founding
entrepreneur and the firm. Each change modifies the firm’s management and structure. The firm
transitions from an entrepreneurial firm to a functional structure, seeks economies of scale and
efficiencies. This requires the implementation of formal structures and a functional style of
management - a significant change from the previously unstructured entrepreneurial firm.
Overlaying these two researchers’ classification systems reveal theoretical accord about there
being a critical transition point - the point at which the entrepreneur (the entrepreneurial firm)
makes a transition to a functionally managed organization (Figure 3).

Figure 3: Reconciling theories of structural stages of growth

Source: Solymossy, E. and Penna, A. A. (2000)
These early findings suggested a conceptual framework for gaining insight into the processes
whereby the executive (entrepreneur) developed the requisite capabilities, as well as the

77
processes for the organization to facilitate its becoming a large organization. Conceptually, the
organization level for this transition is depicted in Figure 4 wherein the simple, two-level
entrepreneurial structure transitions to the first stage of a hierarchically structured organization,
becoming a three-level structure.

Figure 4: Transition in organizational structure for a growing firm

Source: Solymossy, E. and Penna, A. A. (2000) To observe, record, and analyse the dynamics
of this transition, data should include the following five informational factors over time (to
permit identifying their relationship to changes being undergone by both the individual and the
organization).

managerial capabilities are developed

i) Beyond the foundation values, knowledge, skills and abilities, the CEO's willingness and
ability to document values and decision making criteria (as well as the other requisite elements)
will be affected by factors internal and external to the firm.
ii) Internally, the capabilities of the employees (or the available workforce), and the level of trust
that the executive is willing to extend will affect it.
iii) Externally, the industry or technology in which the firm participates and the competitive
factors will affect it.
iv) These influences are depicted in Figure 5, in effect magnifying the transition “arrow” to show
some of the effects influencing the transition.

Managing Transition from Start up to Growth: The STARS Model

All businesses go through natural stages of development and evolution. Businesses are dynamic
entities with somewhat predictable courses of action derived from their natural product/industry
growth cycle and their specific current business situations. A business must adjust and adapt to
survive – no matter the economy. They need to understand and be responsive to changes in the
marketplace. This requires strong leadership, a strategic plan and good information about the
marketplace among others. This means that business owners must make necessary changes from
time to time and know how to manage transition effectively.
The number one reason why most businesses (small and large) are failing today is that they do
not recognize the need for a transition nor did they manage the transition effectively. Some
business leaders, who know that there is a need to manage transition, do not know where to get
started and how to make the changes that will ultimately lead to sustainable business success.
Where to start is to acknowledge that all business ventures must have a start –up.

The STARS Model

The STARS model (Watkins 2003, 2009) in Figure 6 provides a perspective on business
evolution and development that identifies the most common business transition:
• Startup
• Turnaround
• Accelerating growth

78
• Realignment
• Sustaining success

The ability to navigate successfully in each situation is crucial to the success of individual
businesses. These basic concepts were developed by Michael Watkins, Professor at Harvard
Business School, and have been applied to business analysis and development, group
management, leadership transitions, and career planning.

Start-up stage: When starting a business, your focus should be on generating cash, gathering
skilled labour for your business, product and marketing development, securing adequate
inventory, and acquiring production technology.
The challenges are in designing new production systems and business structures, selecting
business strategies, recruiting, and building teams, all with limited resources. These are some
of the most important aspects to be effectively managed during the start- up phase:
 Have good vision, get your vision right, get your strategies right and get your action plans
right.
 Assemble a talented business team.
 Gather sufficient capital and operating cash.
 Work to remove problems in your production system.

Turnaround stage: A turnaround is critical when there is a need to save a failing business. It is
similar to radical surgery to save the life of the business. The focus should be on business
restructuring and obtaining external advice as needed. It is a period when employees may be
demoralized and facing layoffs, when decisions have to be made under time and financial
pressures. A turnaround may still fail, due to poor handling of required changes of the new
management in the form of wrong decisions, inappropriate timing, no sense of urgency/
slackness, or complacency.
Thus, what you need is to re-evaluate your business plan and make the necessary changes to the
strategies, markets, products, or technologies that are not working. More importantly, you need
to:
ommunicate it to your employees
-core business activities

Managing and accelerating growth: There are times when entrepreneurs have to deal with the
challenges and opportunities of increasing demand. Opportunities arise from a demonstrated
potential for growth, which help to motivate stakeholders through earnings, revenues or bonuses.
Your focus should be on managing the pressures of scaling up production by ensuring the
resources required, improving the existing systems, and creating new business structures.
A good example is Ball Horticultural Company (www.ballhort.com), a major producer and
distributor of ornamental plants and seeds, has been in business for over 100 years. After WWII,
the company started a major phase of expansion and accelerating growth based on mergers and
acquisitions strategies, diversification, and the development of new products and new markets.

79
Currently Ball operates in publishing, biomedical research, marketing, and plant production in
over 20 countries.
Modify your business model for quicker response to market needs as follows:

gn new business structures as a way to ensure financing for expansion

Sustaining growth/success: Some businesses reach their desired level of growth/success but
struggle to sustain it. Sales are adequate, and the business is performing well, with a strong and
experienced team or teams and production lines. The positive impact is that employees and staff
are motivated to continue their history of success. The focus should be on business-model
innovation – developing a persistent competitive advantage through continuous improvement of
the business model. An emphasis on innovative new products and plant quality has also helped
companies to sustain their successes.
In order to sustain growth/ success, you also need to:

-model innovation
-model improvements

planning; a production plan; and a business plan.

Transition Managers and the Transition Management Process: Transition managers are in a
unique position to facilitate the Transition Management Process, working simultaneously with
new business development project teams, divisional interfaces and senior management. The steps
to guide this process include:

project team;

text for managing innovations;

Pitfalls in Managing Transitions from Start up to Growth: Success in business is never

automatic. Starting a business is always risky, and the chance of success is slim. According to
the U.S. Small Business Administration, over 50% of small businesses fail in the first year and
95% fail within the first five years. The short answer is, regardless of the industry, failure is the
result of either the lack of management skills or lack of proper capitalization or both.
The common causes of failure in business transitions include:

cash reserves

80
buying habits

o competition, technology, or other changes in the marketplace

onitoring

What to Expect Beyond Business Growth: Beyond the growth and success of a business
comes in the danger of bureaucracy. If the root cause of bureaucracy is not quickly detected and
eliminated, the business will likely experience a decay which will lead to its fall or shut down
(see Figure 7). More than this, the entrepreneur can anticipate problems and bureaucracy before
they occur, so that he can meet them with pre-prepared solutions which will lead to the renewal
of an organization (see Figure 8).

REVIEW QUESTION:
Explain what the management should do to carry along the employees during transition.

TOPIC: PLANNING AND DECISION MAKING IN TRANSITION SITUATION

INTRODUCTION:
Planning is deciding in advance what to do, how to do it, when to do it and who is to do it.
Without plans, managers cannot know how to organize people and resources and they cannot
lead with confidence. The important principles of planning are primacy of planning, contribution
of planning to objective, efficiency of plans, planning comprehension, flexibility and planning
control. The eight steps in the planning process and the five critical success factors in planning
for a successful transition are outlined in this handout.

WHAT IS PLANNING?
i) Planning can be defined as the process of setting objectives and putting up the necessary steps
to achieve the objectives. It is the process of determining a desired future and the steps necessary
to bring it about. It involves setting objectives, forecasting the environment, analyzing problems

81
and taking decisions. Taking rational decisions on transition in a business organization is not
possible without proper planning.

ii) Planning can be defined as the process of setting goals (targets) for the organization and
developing strategies or approaches to accomplish them. Goal setting is very important to
managers. According to Peter Drucker, choosing the right goals and choosing the right means for
attaining them are very vital to the process of management. However, some managers do fail to
set goals.

iii) Planning is deciding in advance what to do, how to do it, when to do it and who is to do it.
Without plans, managers cannot know how to organize people and resources and they cannot
lead with confidence.

iv) Planning is generally in two forms. It can be at the corporate level or lower levels and it may
be of long term nature or short term. Strategic planning is concerned with the long term planning
while operational planning is concerned with the short term planning.

Principles of Planning
The aim of every plan and the supporting plans is for the entrepreneur to be able to achieve his
organizational objectives. In addition to knowing the steps in the planning process, it is also
necessary for the entrepreneur to know the planning principles. The important principles of
planning are: primacy of planning, contribution of planning to objective, efficiency of plans,
planning comprehension, flexibility and planning control.

Eight Steps in the Planning Process: The eight steps in the planning process below are
essential for effective planning:
1. Analyzing the environment/identifying investment opportunity
2. Setting objectives
3. Forecasting the environment/developing the planning premise
4. Determining alternative courses of action
5. Evaluating the alternative courses of action
6. Selecting a course of action
7. Formulating support plans
8. Budgeting for the plan.

Critical Success Factors in Planning for a Successful Transition: The success of your
business transition depends on the quality of your plan and the quality of the plan is dependent
on your understanding and thoroughness in exploring all the pertinent factors that could affect
your plan’s implementation. We believe that following these proven processes in strategizing
your plan will help you in achieving a successful transition:
■ Transitional Objectives: What do you (your spouse/significant other, and other stakeholders)
want to achieve from your succession and exit?
■ Personal Review: What is your personal situation and what are the necessary planning
initiatives?
■ Business Review: What is your current business situation and how does it reach its potential?

82
■ Consider the Best Way to Exit: What method of transition should be adopted to meet your
objectives?
■ The Business Transition Planning Report: What specific action needs to happen, by whom and
by what time frame to ensure the plan is implemented and meets your personal and business
objectives?
Other critical factors in planning transitions include accurate timing, having a formal written plan
and securing contingency protection. Also, these three land mines must be avoided: a non-
collaborative approach, not considering all stakeholders and losing control.

The benefits of planning:

d personal goals

DECISION MAKING IN BUSINESS TRANSITION

Introduction: A decision is a choice made from at least two alternatives while decision-making
involves the selection of one alternative from two or more possible alternatives, based upon
some criteria. Decisions can either be programmed or non-programmed. However, to make an
effective decision, a manager should create a constructive environment, generate good
alternatives, explore these alternatives, choose the best alternative, check the decision,
communicate the decision, and take necessary actions.

Definition of Decision Making: Decision-making is the process of identifying and selecting a

course of action to solve a specific problem. Decision-making involves the selection of one
alternative from two or more possible alternatives, based upon some criteria. Decision-making is
the art and science of giving thought to, and making a choice or judgment about an idea or a
problem.
Which machine do we buy? When should we computerize? How do we cope with declining
productivity? How do we adjust to a new government regulation? All of us have to make
decisions every day. Some decisions are relatively straightforward and simple: Is this report
ready to send to my boss now? Others are quite complex: which of these candidates should I
select for the job?
Simple decisions usually need a simple decision-making process. But difficult decisions typically
involve issues like these:
Uncertainty - Many facts may not be known.
Complexity - You have to consider many interrelated factors.
High-risk consequences - The impact of the decision may be significant.
Alternatives - Each has its own set of uncertainties and consequences.
Interpersonal issues - It can be difficult to predict how other people will react.

83
With these difficulties in mind, the best way to make a complex decision is to use an effective
process. Clear processes usually lead to consistent, high-quality results, and they can improve the
quality of almost everything we do.
A decision is a choice made from at least two alternatives. The selection is based upon some
criteria, such as:
i. winning a greater market-share
ii. reducing the cost of operations
iii. saving time
iv. improving customer service on the counter
v. enlarging the image or prestige of the organization.
Throughout the career of a manager, therefore, he must make several decisions, on a daily basis.
The more it is done, the more expertise the manager acquires. Four possible situations usually
alert the manager that there is a problem that require a decision to be made.

Programmed Versus Non-Programmed Decisions: Programmed decisions are routine and

repetitive decisions that are associated with standardized decision rules. They are often made in
accordance with written or unwritten rules, procedures, policies or regulations. For example,
deciding how much to pay a newly employed.
Non-programmed decisions are decisions that occur so infrequently that standardized decision
rules to solve them are not available. They are unusual or exceptional problems, which have not
come up frequently enough to be covered by a policy, or are so important that they must be
specially handled. For example, how do we cope with the issue of business transition, stress,
declining sales or how do we restructure the organization for efficiency?

Seven steps in the non-programmed decision-making process:

A Systematic Approach to Decision Making: A logical and systematic decision-making

process helps you address the critical elements that result in a good decision. By taking an
organized approach, you are less likely to miss important factors, and you can build on the
approach to make your decisions better and better.

There are six steps to making an effective decision:

Step 1: Create a constructive environment

84
To create a constructive environment for successful decision making, make sure you do the
following: establish the objective; agree on the process; involve the right people; allow opinions
to be heard; make sure you are asking the right question; use creativity tools from the start

Step 2: Generate good alternatives

Some of the key tools and techniques to help the entrepreneur develop good alternatives include:
generating ideas; considering different perspectives and organizing ideas.

Step 3: Explore the alternatives

When the entrepreneur is satisfied that he/she has a good selection of realistic alternatives, then
he/she will need to evaluate the feasibility, risks, and implications of each choice.

Step 4: Choose the best alternative

After the entrepreneur has evaluated the alternatives, the next step is to choose between them.
The choice may be obvious.

Step 5: Check your decision

With all of the effort and hard work that goes into evaluating alternatives, and deciding the best
way forward, it is easy to forget to check decisions made. Thus, there is aoneed for the
entrepreneur to look at the decision he is about to make dispassionately, to make sure that his
process has been thorough, and to ensure that common errors have not come into the decision-
making process.

Step 6: Communicate your decision and move to action

Once the entrepreneur has made his decision, it is important to explain it to those affected by it,
and involved in implementing it.

The Characteristics of Decision-Making

-making permeates all management.
m of organizational
setting.

The basic process of rational decision-making involves diagnosing and defining the problem,
gathering and analysing the facts relevant to the problem, developing and evaluating alternative
solutions to the problem, seeking the most satisfactory alternative, and converting this alternative
into action.

Conditions under which Managers make Decisions

In general, managers make decisions under three possible conditions, namely: certainty, risk and
uncertainty. Each of these conditions is briefly discussed below.
i. Decision-making under conditions of certainty: Under conditions of certainty, a manager
will have had enough information to know exactly what the outcome of his decisions will be.
With enough information at his disposal, it simply becomes convenient for him to act as if a
condition of certainty exists. The results or outcomes of such decisions are known with certainty.

85
ii. Conditions of risk: Conditions of certainty are the exception rather than the rule in today's
complex, rapidly-changing business organisations. Under this, managers can know the
probability of each of the various possible outcomes associated with a decision, even though they
cannot be completely certain which particular outcome will actually occur.
iii. Conditions of uncertainty: When the exact probabilities attached to the alternatives
available to a decision-maker are unknown, a condition of uncertainty is said to exist. Most
managerial decisions involve varying degrees of uncertainty. There are usually too many
variables, or too many unknowns that can affect a decision, for managers to be able to precisely
predict its outcome. When such cases arise, managers must use their experience, judgment and
intuition to assign approximate probabilities to each of the alternatives available. By so doing,
they will be able to narrow the range of choices and simplify the decision. The importance of
decision-making in industrial organizations is indicated by the frequent assertion that
decisiveness is one of the necessary requirements of the successful executive. By this is meant
the ability to act definitely and to direct the efforts of others accurately and without hesitancy.
The quality of this decision-making resulting from the laid-down process is a measure of the
executive's leadership ability.

REVIEW QUESTIONS:
1. Setting objectives and priorities is part of planning True or False
2. Good planning reduces employee uncertainty True of False
3. Discus planning in business
4. Explain the critical factors necessary in planning for a successful business transition
5. There is a difference between a decision and decision making True or False
6. Simple decisions usually need a simple decision-making process True or False
7. Discus a systematic approach to decision-making
8. Write short notes on the following:
i. Levels of strategic decisions
ii. Conditions under which managers make decisions
iii. Crisis decision making

REVIEW QUESTIONS:
1. Stress and pressures are good for managers managing transitions, True or False
2. Poor communication networks is a cause of stress, True or False
3. What are the common causes of stress for managers?
4. How can managers and employees prevent or manage stress in business transitions?

REFERENCES
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