The Nature of Business Enterprise in Nigeria

The Nature of Business Enterprise in Nigeria.

Definitions

In any organized society, several institutions exist to serve the needs of people in that society, government creates several institutions to enable it carry out its function of providing law and order, security of life and property, regulation and control of the activities of individuals and groups in the society, development of infrastructure and promotion of the economic, social and cultural welfare of the nation. Institutions are also established to serve the needs of people for goods and services. Such institutions provide these goods and services to people with the aim of making profit for their owners. In many societies, these institutions are non-governmental but there are quite a number of societies where government also engages in providing these goods and services.

Also Read:The Nigerian economic system

A third category of institutions exist. These are non-profit and non-governmental institutions which are established to render certain services which neither government nor profit-oriented establishments render. They are usually concerned with educational, cultural, religious, environmental, etc. issues.

Institutions whose primary goal is profit are generally known as business enterprises. A business enterprise is a decision-making unit concerned with serving certain needs through the production and distribution of goods and rendering services at a profit for the owners. The distinguishing feature of business enterprises in relation to other institutions of society is profit. Other institutions may produce goods or render services but they do not generally do so for the purpose of making a profit. For example, a government-owned medical laboratory may produce vaccines for controlling certain animal diseases, but this activity is usually not carried out for the purpose of making a profit. Similarly, a non-profit and non-government agency may render Services without the aim of making a profit.

Also Read: THE BASIC FORMULA FOR STRATEGIC MANAGEMENT ON BUSINESS ORGANISATION

It is important to recognize that the term business can be used loosely. It
may be used to describe a wide variety of activities or transactions that an
individual or group may engage in. A dictionary defines it as a commercial
activity engaged in as a means of livelihood; a trade a profession, occupation or a particular field of endeavour. From this definition, it is obvious that the term can be applied as a general term for most human activities. Specifically however, business is defined as any lawful human activity which involves the production and distribution of goods or the rendering of services for the purpose of making a profit.

Objectives of the business enterprise

Our definition of the business enterprise stresses that the primary objective
of business is to make profit by identifying and effectively serving the needs of consumers. This is correct. Profit is the primary motive for establishing a business enterprise. It is a reward for investing one’s savings in a venture in spite of the fact that the future outcome of the venture is uncertain. That is, profit is a reward for assuming the risk of establishing a business enterprise.
Profit serves other functions. It is the principal source of growth and continued existence of the business enterprise.

Through re-investment of profit, the business enterprise can be expanded. Profit also serves as a measure of performance. It is an index by which the performance of one enterprise can be compared with that of another or the performance of the same enterprise can be evaluated over time. Consequently, profit is an incentive for people to work harder and more efficiently.

There are however secondary objectives of business which are related to and dependent on the profitability objective. Among the secondary objectives are: etc.

(a) Growth Objective The expansion of the business enterprise is one of the objectives of business. This may take the form of increase in sales turnover, market share, number of people employed, capital employed.

(b) Innovation. This is an important means of striving to satisfy the needs of consumers better than competitors. Innovation involves introduction of new products, new method of handling distribution, new method of production, etc.

(c) Productivity. It is particularly important to the business enterprise that productivity is improved. Productivity is the ratio of output to input in a given period of time. It is the extent to which a business enterprise is able to utilize a given set of resources to achieve the highest possible value of output. Productivity may be measured over time in terms of output per employee, output per unit of capital invested or output per unit of the most critical resource invested.

d) Employee Satisfaction. Business enterprises seek to enhance the satisfaction of employees as a means of optimising their contribution to the growth and competitiveness of the enterprise.

(e) Shareholder Satisfaction. To guarantee continued support of investors, business enterprises seek to improve the returns to shareholders while at the same time reducing their risk.

(f) Public Image A positive public image for the enterprise enables it to obtain the resources it needs on favourable terms. Thus the business enterprise strives in various ways to improve its image as a good corporate citizen involved in the production and distribution of high quality products. It also strives to project itself as an enterprise which is concerned about its employees and the community in which it operates.

It is clear that the business enterprise has multiple objectives which are related one to another.

Structure of the business enterprise

The production and distribution of goods and services involves a large number of activities. The structure of a business enterprise is the pattern of grouping and allocation of these activities to people as well as the distribution of authority among them in order to achieve the objectives of the enterprise. The activities can be grouped in a large number of ways. Most often, they are grouped according to the basic functions they are expected to serve. These are marketing, production, finance and accounting and personnel functions.

Marketing includes activities involved in ascertaining the needs of consumers, developing suitable goods to meet the needs and distribution of the goods to consumers. Production function incorporates all activitiesthrough which raw materials are procured, and converted into needed products. Finance involves activities needed to obtain the required funds; allocate and control the utilization of the funds while all activities by which financial transactions are recorded, summarised, analysed and interpreted for business decision-making are included under accounting. Personnel function encompasses all activities by which human resources are procured and utilized in the business enterprise.

The distribution of authority among people performing various functions in the enterprise is also an aspect of the structure of the business enterprise. As with all human institutions, authority is unevenly distributed. Some people are giver more authority than others. However, the basis of Introduction to business
4
distribution of authority is the responsibility that a person has for people, money, materials and information needed to produce and distribute goods
and services. The higher the responsibility that a person has in the business
enterprise, the more the authority that is assigned to such a person, so that
he/she can carry out the responsibilities. Hence there is a hierarchy of authority in the business enterprise as shown below:

The diagram shows that the person with the highest level of authority in this business enterprise is the managing director. The managers in-charge of the functional areas cach have the same level of authority over activities assigned to them but their authority is, in turn higher than that of their subordinates.

Stake-holders in the business enterprise

A stake-holder is a person or group of persons who have committed something to the business enterprise and therefore has expectations from it.

There are different stake holders in the business enterprise. These are owners, managers, employees, consumers, suppliers, distributors, creditors, competitors, government and the community. Below are the commitments of some stakeholders and their expectations from the business enterprise

(a) Owners Those who have committed their savings to provide capital for the business enterprise and assume the risk associated with it are the owners of the enterprise. They expect to make profit so that they can have a satisfactory return on their investment Owners also expect the business enterprise to expand and minimize the risk of failure of the enterprise.

(b) Managers The managers are those who have been entrusted with theThe nature of the business enterprise responsibility of directing the affairs of the business enterprise so that it realises its objective of profitability Managers expect the owners to give them a free hand to use their professional skills in the pursuit of the objectives of the enterprise. They also expect the business enterprise to expand and provide them with better remuneration and prospects.

c) Consumers These are individuals, households and firms who have needs that they want to satisfy. Consumers are important to the business enterprise because their patronage or lack of patronage of the goods and services of the business enterprise determine the success or failure of the business. Consumers expect the business enterprise to provide them with goods and services that are designed to suit their taste. They want high quality products that they can afford and which are readily available.

(d) Employees Employees contribute their skills, ideas and energy to carry out the various activities and transactions of the business enterprise. They are interested in having better career opportunities in the enterprise, better remuneration, job security and dignity.

(e) Suppliers. The business enterprise depends on suppliers to provide it with raw materials and services in order to have an uninterrupted flow of production Suppliers too depend on the survival and growth of the enterprise for their own survival and growth. They expect the business enterprise to pay for goods and services supplied according to the terms agreed upon.

(i) Distributors. The main role of distributors is to facilitate the delivery of goods produced by the business enterprise to consumers. Distributors invest in facilities that will enhance their capability of delivering goods to consumers efficiently. They however expect the business enterprise to support them with promotional materials and suitable pricing policies

(g) Government: It is the responsibility of government to create conducive environment in which the business enterprise thrives. Government here man federal, state and local governments. The programmes and policies of government are expected to facilitate, not hinder the
opctations of the business enterprise. On its own pan, the business triterprise is expected to obey the laws and regulations of the country pay taxes promptly and generally contribute, as a good corporate then, to the total development of the society.

(h) The Community. The community consists of the people and groups in mediate vicinity of the area of operations of the business The community and the business enterprise are Interdependent as each enjoys the natural and human resources available in the locally. The business enterprise uses land, water resources and other social infrastructural facilities of the community. The community depende on the business enterprise to promote the quality of life of the community by providing Jobs Involvement in the social and cultural life of the community and protecting the environment.

Classification of business enterprises

There are different ways of classifying business enterprises. They may be classified according to the k economic sector/industry to which they belong or according to their location in the production process, Business enterprises may also be classified by size, type of customer, type of goods produced, cte. The method of classification adopted depends on the purpose it is intended to serve,

The International Standard of Industrial Classification (ISIC) is a common method of classification of establishments into various economic sectors. This method adopts a numbering system that makes it possible to classily establishments precisely into divisions, then into major groups and then into subgroups. The numbers used for divisions and major groups are shown below;

No. Industry Division/Group

01-09 Agriculture, Forestry and Fishing

10-14 Mining

15-19 Construction

20-39 Manufacturing

4049 Transportation, Communication,

Electric, Gas and Sanitary services

50-51 Wholesale trade

52-59 Retail trade

60-67 Pinance, Insurance, Real Estate

70-89 Services

91-97 Public Administration

99 Non classifiable establishments,

The division is indicated by the first digit and the major group of the establishment is indicated by the second digit. Examine the isic classification of the food manufacturing group shown below. Note that there are other groups in the manufacturing industry.

Food Manufacturing
No Industry products
3111 Meat Product
3112 Diary Products
3113 Canned fruit and Juice
3115 Oils and fats
Products Sausages, Edible fats
Milk, Yogurt, Butter
Fruit Drinks
Palm oil, Margarine
Rice-Milling, Flour.
Biscuits, Bread
Sugar
3116 Grain Mill Products
3117 Bakery Products
Sugar Factories
3118

The first two digits of ISIC number indicates that the establishment is in the manufacturing sector and in the food manufacturing group. The last two digits indicate the establishment is involved in meat products preparation such as sausages, edible fats, etc.

Business enterprises can be classified according to whether they are largely owned by government and its agencies or by private individuals and firms. When a business enterprise is owned by government or its agencies, the enterprise is regarded as a public sector enterprise. If it is owned by private individuals/firms, it is regarded as a private sector enterprise. The extent to which government owns business enterprises in an economy is of public interest. As we shall see later in this chapter, government ownership and control of business enterprises determine the nature of the economic system in operation in the country.

When business enterprises are classified according to their location in the production process, we have extractors, processors, assemblers and facilitators. This classification may simply be collapsed into two- primary producers and secondary producers. Extractors are primary producers while processors, assemblers and facilitators are secondary producers. Extractors consist of those business enterprises whose primary activities involve mining, quarrying, fishing, lumbering or generally obtaining useful items from land, sea, forests, etc.

The items in their crude state are then moved to other business enterprises called processors to clean, shape, refine, or generally convert to more useful state. Assemblers are those enterprises that put together or combine various components to make a new product. Facilitators are those that provide support services to the others. Examples of facilitators are banks, insurance companies, brokerage firms, etc.

Another useful method of classifying business enterprises is according to size. There are various ways in which the size of an enterprise can be measured. Size may be measured by the total sales of an enterprise during a given period of time, the number of people employed on full-time basis, the total capital employed in the enterprise or the value of total fixed assets employed. The type of measure adopted depends on convenience but the most popular measures of size are total fixed assets employed and number of full-time employees.

The Federal Ministry of Industry has four categories into which business enterprises may be classified by size. These are micro enterprises, small-scale enterprises, medium-scale enterprises and large-scale enterprises. Micro enterprises have value of total fixed assets (excluding land) not exceeding N400,000.00 while for small-scale enterprises, the value of fixed assets range between $400,000.00 and N5 million. Medium-scale enterprises have value of fixed assets exceeding N5 million but not more than N10 million. Enterprises whose fixed assets exceed N10 million are considered to be large- scale enterprises. It must be noted that the categories noted above and their definitions are not stable over time, for as the economy develops and with inflation, the definitions are adjusted to reflect the prevailing conditions. For example, in the sixties, small-scale enterprises were defined as establishment whose fixed assets (excluding land) did not exceed N150,000.00. Compare this figure with the latest definition of small-scale enterprise in which the corresponding value is N5 million.

There are a large number of unregistered and unincorporated businesses engaged in retail and wholesale trade, craft industries, manufacturing, services, etc. Most of them are owned and operated by one person occasionally with the support of members of his/her family. Many do no have permanent or fixed addresses and the capital employed is usually small Enterprises with these characteristics are said to belong to the informal sector of the economy. Those that are duly registered with the appropriate agencies of government or are incorporated are classified as belonging to the form or organised sector of the economy.

The economic setting

An economic system is a structure of beliefs theories, practices and relationships in a gwen society or political entity. It exists to solve problems of resource development and location, employment, and the increase of well-being or growth verthin the society. Businesses and firms operate in an economie set up. Every business, every firm is in effect, a unit of an existing economic system. It is the complex pattern of economic activities thatproduces goods and or services for purchase and use by people and, in doing this generates employment, wages and salaries through which the people can buy the commodities and services produced by the economic system. Besiness systems are also concerned with these same activities of production, distribution and exchange as well as consumption.

Thus business and economics have very wide common grounds and the nature of the economic system definitely affects, and even dictates, the nature of business, and vice versa.

Perhaps another way to look at it is to say that an economic system is a set of principles and techniques by which the ownership and allocation of economic resources are decided and organized by society. Here, we shall carine three economic systems of interest, namely:

a) the capitalist economic system;

b) the socialist economic system;

c) and the mixed economic system.

Against the background of these economic systems, we shall look at the nature of the Nigerian economic system and subsequently discuss the role of business in the Nigerian economy.

The capitalist economic system

Capitalisco is a political and economic ideology which supports and practises invidual and private ownership of resources, encourages competition in the pursuit of financial profit, and advances minimal regulation of economic activities by government. Adherents – whether individuals, governments or countries of this ideology are usually described as capitalists. The basis of the capitalist economic system (also known as the free-enterprise system, private-enterprise system, or market economy) is the belief that when each member of the society is allowed to pursue his rational self-interest, the Maximum common good will be generated. It believes that the greatest common goal is the sum of its constituent parts and anything that interferes with the individual rational self-interest will reduce that sum. In this system, it is believed that the mechanism that assures that the pursuit of myriad private goals will produce public good is the market, which impersonally sets prices for both the factors of production – land, labour, and capital – and the product of industry.

Thus, with the factors of production in private hands, the proportions in which these factors are combined produce different goods and services are determined through the price mechanism. If something is supplied in quantities greater than are required, the price will fall or production will be reduced, or both results will occur. If there is unsatisfied demand for any product, production will be stimulated.

Therefore the capitalist or private enterprise economy is characterized by

(a) private ownership of property,

(b) freedom of choice, that is, freedom to choose what to buy or produce and freedom to enter or exit the exchange market or the production/distribution system;

(c) competition, in the sense that all parties in a market economy seek and try to maintain relative positions of strength with respect to the market;

(d) economic decision being made and sustained by the interplay of the forces of demand and supply;

(e) the pursuit of private profit.

The free-enterprise economy exists in many western countries such as Great Britain, France, United States of America, Germany, Italy and Spain. Other countries include South Africa and Japan. Various forms of the capitalist economic system are practised in different countries depending on the degree of freedom of choice and of competition as well as the extent of individual ownership of property.

The socialist economic system

Socialism is a political and economic practice which favours more or less complete nationalization of means of production in order to right the perceived wrongs or injustice, inequality and suffering brought about by the capitalist mode of production and the free and uncontrolled market on which it rests. It opposes the acquisitive individualism of capitalism and plans for, a future in which the masses would wrest control of means of production and government from the capitalists. Individuals, governments, and countries adhering to this ideology are usually described as socialists.

The basis of the socialist economic system (also known as command
economy or centrally planned economic system) is the observation that the private-enterprise system accepts patterns of unequal wealth and income distribution, and that, because of technological and other developments some products attain a size and importance that destroys the competitive conditions required for the operation of the market mechanism

Thus the socialist economic system or command economy supports centrally planned, public ownership of means of production and the central determination and control of what is produced. In this way, socialists argue, inequalities of wealth and income are to be reduced or eliminated and economic activities organized according to agreed upon social and political objectives.

Thus the characteristics of the socialist economic system include the following:

(a) state (or government) ownership of means of production;

(b) basic industries are owned by the state. Only very few industries come under private ownership;

(e) central planning is the key to all economic activities. A central planning authority or the government decides on what factors to use to produce what goods and services and in what quantities;

(d) decisions of the state authority are conveyed to producers land consumers who are then directed (commanded?) to comply.

Command economy is mainly practised in the Eastern block of the world, notably in mainland China and North Korea. The USSR used to be a strong practitioner of the socialist economic system until the break-up of the. Republic in 1992. Another strong practitioner of central planning of the economy is Cuba, right under the nose of a powerful opponent, the U.S.A. The former has suffered severe economic sanctions in recent years at the hands of the latter.

Mixed economy

In practice no country keeps strictly to the free-enterprise economic system (market economy) or to the centrally planned economic system (command form pure economy). Thus, neither of these is to be found in practice in its since all economic systems contain varying degrees of each. There are reasons for this development.

Recognizing the criticisms of the market economy many Western
Nations accept a degree of state ownership and involvement with the means of production, mainly in the area of public utilities (water, electricity) and basic industries and infrastructure (roads, energy, postal services). All governments in market economy take an active part in influencing the nature and tempo of economic growth by controlling such key economic variables as the money supply, interest rates, government expenditure and borrowing. This is typical of Great Britain, Germany and United States of America.

On the other hand, command economies begin with the assumption that state determination of economic goals and detailed state control of economic activities are desirable as a matter of principle. The way resources are allocated to investment, or how output of goods and services is determined and organized, is a detailed economic plan that attempts to ensure, by administrative direction rather than incentives, that all parts of the economy and every enterprise perform according to a complex set of officially determined interlocking objectives. In practice this has proved to be impossible to attain. Thus, there is a possibility that what the planning authority orders to be produced may be different from what consumers are prepared to buy. Over-production in certain areas and insufficient production in others could be the undesirable result. Under such circumstances some mixture of market economy practices becomes inevitable.

Some examples can be given in this regard. Yugoslavia’ of old and Hungary have the most decentralized socialist economy. Most of the means of production are owned by the state, and the broad allocation of resources is still determined centrally, but within some fairly wide limits, individual enterprises are able to determine their own production schedules and pricing policies and are rewarded on the basis of the profits. Even though the Soviet economic system had been quite rigidly controlled there has been some relaxation in latter years culminating in the recent and definite turn-around towards a market economy. The central controlling authority having lost its grip, the weakened political structure presided over the splitting of the Union into its several independent republics.

The inadequacies of both the command and market economies have left most countries of the world the choice of the mixed economic system. in this system, varying degrees of free market and central planning practices are mixed in proportions that are intended to realize certain economic objectives. Countries that may be described as being in this category include most African and South American nations, that politically also belong to the non-aligned movement, such as Nigeria, Ghana, Cote D’Ivoire, Uganda, Egypt, Zaire, Sudan, Ethiopia, Angola, Tanzania, Liberia, Chad, Argentina, Brazil, Chile, Panama; Colombia, Venezuela, and Bolivia. Others are India, Pakistan, South Korea, and Saudi Arabia.

In general mixed economies do not have equal proportions of both the market and command economic systems. Moreover, for a particular country the proportions of the mixture are not necessary static or
unchanging Ghana for instance, leans more towards a command system while Nigeria relies more on the market mechanism. However, both countries in their economic policies which keep changing over time, try to overcome the disadvantages of both the pure market economy and the command economy. Ultimately the success of a mixed economy, or any economy for that matter, depends also on the foresight and selflessness of the leaders, on the genuineness of the intention of the people to improve.

From the mid-1970s it dissolved into five political units countries: Serbia- Montenegro Croatia Slovenia Bosnia-Herzegovina Macedonia. Their lot come what may, and the sincerity and understanding of the superpowers with which the economy must interact.

 Source >>> Nigerian Pricing

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