Full Project – ENTREPRENEURIAL STRATEGIES AND THE DEVELOPMENT OF SMALL AND MEDIUM SCALE ENTERPRISES (SMEs) IN LAGOS STATE, NIGERIA
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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Small and medium enterprises (SMEs) have increasingly become a powerful engine for economic growth and development in today’s rapidly growing and dynamic competitive global economy (Khan, Obaidullah & Alam, 2011). On the contrary, the performance and effectiveness of small and medium scale enterprises as an instrument of economic growth and development in Nigeria has long been under academic scrutiny. This intense scrutiny has been against the backdrop of the low performance and inefficiency that characterized small and medium scale enterprises particularly in assessing its role on economic growth and development (Small and Medium Enterprises Development Agency of Nigeria, SMEDAN;2010).The future of entrepreneurship is a moving target and a work in progress that is widely expected to lead through innovation and adaptation for the development of entrepreneurs (Snyder, 2011).
The work of Snyder (2011) further noted that majority of job losses in America occurs in large companies which form less than 20% of American businesses while majority of jobs were created by small businesses. An entrepreneur is an innovative person who maximizes his/her profit by following strategies on venturing into commercial undertaking (Dabson & Wilcox, 2012). The characteristics of an entrepreneur include risk taking, curiosity, imaginative, persistence, goal setter, hardworking, confident, flexible and independent. A study by Kauffman foundation in 2011 examined the relationship between economic growth and entrepreneurship and came to the conclusion that nations with higher level of entrepreneurship activity have better rate of economic growth. Clifton (2009), noted that what the whole world need is a good job and good jobs are unavailable as entrepreneurs have not been able to develop the needed strategies for job creation. Good jobs have become necessary because social contracts between big companies and their employees have changed overtime. Therefore, the best job available is that where you are owner and
self-employed (Clifton, 2009). Dabson and Wilcox (2012) noted that most developing countries use entrepreneurship as an economic development of last resort. For Nigeria to develop through the use of entrepreneurship like other developing nations the leaders must take cognizance of the people’s ability to create wealth, the process through which growth is achieved, the community where the activities take place and policies and practices that foster entrepreneurship in both public and private sectors (Dabson & Wilcox, 2012).
An SME according to the Central Bank of Nigeria (CBN) is one whose capital employed excluding land is between ₦1 million and ₦150 million and employs not more than 500 persons (Ebitu, Ufot, & Olom, 2015). Lagosdele (2007), noted that SMEs represent 90% of the enterprises in African, Caribbean and Pacific (ACP) countries. Also, SMEs provide 70% of employment opportunities for the citizens and promote the development of local technology. Oyedijo (2012), have observed that small businesses employ 53% of the private workforce and account for 47% of sales and 51% of private sector gross domestic product. SMEs possess great potential for employment generation, improvement of local technology, output diversification, development of indigenous entrepreneurship and forward integration with large scale industries (Central Bank of Nigeria quarterly publication, (2011).
Entrepreneurial strategies on the other hand is the means by which an organization establishes and re-establishes its fundamental set of relationships with its environment characterized by changes in the pattern of decisions taken by the organization. These strategies include competitive strategy which involves the ability of the organization to achieve leadership status in the dynamic and uncertain market they operate; human resources strategy which capitalizes on the use of the employees to achieve the organizations aims and objectives; market orientation strategy involves aligning the organizational output to suit the market and customers need and adaptation strategy which involves the use of innovation to allow the organization becomes relevant all in a bid to achieving SME development.
SME development is the growth of a SME with the systematic use of scientific and technical knowledge to meet specific objectives or requirements of the organization.
SME development in this study is measured with the organization’s return on investment (ROI), employee’s productivity, market share and the business policies of the firm. A major gap in Nigeria’s industrial development process in the past years has been the absence of a strong and virile small and medium enterprises sub-sector (SMEs) due to financial constraints explained by high lending rates, high loan requirements and lack of viable entrepreneurial skills which does not allow SMEs to possess the much needed competitive strategies.
Furthermore, SMEs cannot employ the full arsenals of their entrepreneurial strategies due to constraints such as lack of adequate credit for SMEs, traceable to the reluctance of banks to extend credit to them. This situation arises due to poor documentation at project proposals because the human resources strategies are poorly implemented or inadequate. Matanmi and Awodun (2005) posit that if Nigeria desire to move out of the disturbing high level of unemployment and ravaging level of poverty, adequate attention must be given to the growth of entrepreneurship. They concluded that Nigeria still remain in the doldrums because of the combination of ignorance, low capacity building and lack of encouragement for entrepreneurship coupled with lack of entrepreneurial strategies.
This work will focus on SMEs within Lagos State and analyze entrepreneurial strategies in the form of competitive strategy, human resources strategy, market orientation strategy and adaptation strategy and how it relates to the development by considering market share, return on investment, business policy and employee productivity.
1.2 Statement of the Problem
Akingbolu (2014), Okezie, Odii, and Njoku (2013) has documented that 70% of SMEs fail in their first three years of operations in Nigeria because of their economy of scale. This is coupled with the dynamic nature of the environment, greater competitive firms and the need for continuous innovation. Product customization and growing use of ICT, forces firms to face challenges of improving their competitiveness. These difficulties are greater for the highly competitive environment for small scale businesses which negatively affect their Return on Investment (ROI). The inability of top management of SMEs to properly analyze the market is one of the leading causes of reduction in Return on investment (ROI) for SMEs (Aaker, Kumar & Day, 2008). This is as a result of their
inability to formulate and implement appropriate competitive strategies for diversification, to fulfill their role of being an industry low cost provider, developing expertise and creating a niche for their companies that will allows for SME Development.
Mwangi and Omhui (2013) posit that inability of small scale and medium scale enterprises (SMEs) to gear effort towards applying effective competitive strategies reduces return on investments because of the severe competition they face from multinational companies in the market and the need to meet consumer’s requirement for quality, quantity and price has been a major challenge that has led to the collapse and eventual failure of many SMEs. The entrepreneur’s inability to put in place adequate competitive strategy that would lead to responsive customer satisfaction, revenue growth and increased returns on investment is a factor that leads to failure (Offor, 2012).
With greater competition in the globalized market, emphasis on firm management employing human resource strategies through recruitment and selection, employee retention, compensation in SMEs have been insufficient and this inhibits their performance and diminishes finances (Apulu, Lathan & Moreton, 2011).
Asiedu-Appiah, Aduse-Poku and Abeeku-Bamfo (2013) in their study revealed that majority of SMEs do not follow formal recruitment and selection practices. It was also evident that existing recruitment and selection practices were not systematic and lacked consistency as these practices were based on the understanding of owner-managers who had little or no expertise in the subject. These lackadaisical human resource strategies does not allow for the input of the best entrepreneurial team that will lead to increasing financial performance for the SMEs.
Despite, its significant position as the giant of Africa, in terms of natural resources, majority of firms predominantly small and medium scale enterprise still underperform while others wind up within first five years of business in Nigeria. Only five to ten percent survive to achieve maturity stage, even with available financial resources (Ayanda & Danlami, 2011; Onugu, 2005), due to lack of strategic human resource planning (Okpara, 2011) and this lack of human resource strategies has not given room for increasing performance by the SMEs. The poor performance of Nigerian small and medium enterprises (SMEs) is an issue of serious concern to all Nigerians and other
stakeholders (Ibru, 2013). The current chief executive officer (CEO) SMEDAN, Nadada (2013), admitted the following problems facing SMEs in Nigeria to include, among others poor market orientation strategies, inadequate knowledge of managing firms, poor marketing skills, low entrepreneurial spirit and the absence of this leads to reduction in their market share.
Dzisi and Ofosu (2014) posit that SMEs are still lacking in so many spheres in Nigeria, as their perception of marketing has not shifted from mere advertising unto formulation and implementation of market orientation strategies. SMEs fail to utilize market orientation strategies derived from marketing research and new product development that could attract the improved market share and performance thereby leading to inadequate exploitation of its benefits as well as not giving appropriate value to the entrepreneurs (Leopoulos, 2006).
A study by Ebitu (2015) exposes that in the southern part of Nigeria, marketing problems such as difficulty in managing firm’s advertising, lack of adequate marketing research, unawareness of competition, poor branding and packaging, low level of knowledge on business market analysis, poor promotion, poor segmentation strategy, poor pricing technique and unplanned distribution contribute negatively in affecting SMEs’ profit margin and their sales volume. Ebitu (2015) further observed that most of these problems were as a result of the fact that most of the managers of the SMEs are not knowledgeable about the principles and practice of marketing orientation strategies.
Today’s organizations have to deal with dynamic and uncertain environments. In order to be successful, organizations must be strategically aware. They must understand how changes in their competitive environment are unfolding and they have to innovate so as to enhance their performance thereby increasing their market share. The adaptation strategy of innovation can be used by small and midsized firms over large firms which is one area that has been underexplored (Papulova &Papulova, 2006).
Uchegbulam, Akinyele and lbidunni (2015) in their study posited that with Nigeria’s business environment situated in the midst of a challenging economic landscape and intense competition, Managers are increasingly seeking for strategic approaches to
accomplish, improve and sustain organizational performance which is lacking in most SMEs therefore causing underperformance, under productivity and inefficiency of the SMEs. Currently, business environment is perceived to have been rarely exceeded in complexity, turbulence and rapid in change, all Nigerian organizations (large or small) must pay greater attention than ever before to their environments when formulating and implementing policies and strategies in order to survive and grow (Otokiti & Awodun, 2003).
Otokiti and Awodun (2003) posit that the performance of Nigerian companies is predicated on factors such as low-sales, high cost of production, low capital utilization, lack of foreign exchange to source needed inputs, poor power supply, and low quality of goods and services, among others. These issues have led to lack of proper integration and coordination of various corporate subsystems in Nigerian organizations, resulting in the failure to achieve the stated goals and objectives. Enterprises are subsumed in the environment with which they interact by importing inputs and exporting outputs. Thus, the vagaries and the extremities of the environment affect the fortunes of organizations unless adaptive strategies are implemented to mitigate this (Kennerly & Nelly, 2003). Therefore, given the important contributions of SMEs to the economy and the survival rate of SMEs in Lagos state for the period 2010-2013 at 22% when compared to Lagos 54% and Oyo at 73% (Nadada, 2013) and considering the proximity of Lagos State which is between Lagos and Oyo States, investigation in the state is unavoidable.
This research aims at determining the relationship between entrepreneurial strategies and development of SMEs in Lagos State, Nigeria.
1.3 Objective of the Study
The main objective of the study is to evaluate the impact of entrepreneurial strategies on the development of SMEs in Lagos State, Nigeria. The specific objectives are to:
- examine the effect of competitive strategy on Return on Investment;
- identify the effect of human resources strategy on employee productivity;
- evaluate the effect of market orientation strategy on market share;
- determine the effect of adaptation strategy on business policy and
- examine the effect of Entrepreneurial Strategies on SMEs development.
1.4 Research Questions
The study answered the following research questions:
- What is the effect of competitive strategy on Return on Investment for SMEs development?
- How does human resources strategy affect employee productivity for SMEs development?
- What is the effect of market orientation strategy on market share for SMEs development?
- What is the effect of adaptation strategy on business policy for SMEs development?
- How does Entrepreneurial Strategies affect SMEs development?
1.5 Hypotheses
The hypotheses for the study are as follows:
H01: Competitive Strategy has no significant effect on return on investment for SMEs development.
H02: Human Resources Strategy has no significant effect on employee productivity for SMEs development.
H03: Market Orientation Strategy has no significant effect on market share for SMEs development.
H04: Adaptation Strategy has no significant effect on business policy for SMEs development.
H05: Entrepreneurial Strategies has no significant effect on SMEs development.
1.6 Scope of the Study
This study investigated entrepreneurial strategies and SME development in Lagos State. The state was chosen because of its position as second to the least state in south west Nigeria in terms of SMEs development (National MSME survey report, 2013).
1.7 Significance of the Study
The general understanding of this study would serve as a useful guide to management, practitioners, executive, corporate managers most especially in SMEs to understand how entrepreneurial strategies in their business policies, leadership styles, recruitment and selection, innovation and pricing aid or enable, the relationship and the extent of its effect on the attainment of development by the SMEs. The study would also enable the SMEs to proactively respond to changes within the environment more effectively as well as enable them implement better business strategy for their operation and development. This study would enable stakeholders in SMEs to understand that employing all these strategies together would enable them achieve organizational growth and development.
Understanding from this study would enable the government to create better policies and regulation with regards to the research variables in a way to enable development and growth within the country’s economy and sector as well. Findings from this study will enable the society to be more informed and provide more knowledge with regards to entrepreneurial strategies as it relates to SMEs development. It would also provide more knowledge concerning entrepreneurial strategies and reveal what makes it to be entirely different from one SME firm to another. Lastly, it is also hoped that these findings would contribute to the body of knowledge and stimulate more researcher’s interest in this field of study.
1.8 Operationalization of Variables
The variables of this study are operationalized as follows:
Y = f(X)
Y = Dependent Variable
X = Independent Variables
Where:
Y = SME Development
X = Entrepreneurial Strategies
Y = (y1, y2, y3, y4)
X = (x1, x2, x3, x4)
Where:
y1 = Return on Investment (ROI)
y2 = Employee Productivity (EP)
y3 = Market Share (MS)
y4 = Business Policy (BP)
x1 = Competitive Strategy (CS)
x2 = Human Resources Strategy (HRS)
x3 = Market Orientation Strategy (MOS)
x4 = Adaptation Strategy (AS)
y1= f (x1) …………………………………………. Equation 1
y2= f (x2) …………………………………………. Equation 2
y3= f (x3) …………………………………………. Equation 3
y4= f (x4) ………………………………………… Equation 4
Y=f (X) …………………………………………… Equation 5
The variables in Equation 1- 5 are the working Equations that were evaluated in this study.
y1 = a0 + β1x1 + e
y2 = a0 + β2x2 + e
y3 = a0 + β3x3 + e
y4 = a0 + β4x4+ e
Y = a0 + β1x1 + β2x2 + β3x3 + β4x4 + e
1.9 Operational Definition of Terms
The operational definitions of terms for this study are:
Entrepreneurial Strategy: is the means by which an organization establishes and re-establishes its fundamental set of relationships with its environment characterized by changes in the pattern of decisions taken by the organization.
Competitive Strategy: is defined as long term strategies taken to attract customers, withstand the competitive pressures of the market and also to help and strengthen the firm’s market position taken after evaluating its strengths and weaknesses compared to those of its competitors.
Human Resource Strategy: is a coordinated set of actions aimed at identifying current and future human resources needs in order to integrate an organizations, people, system and culture towards achieving the organizational goal.
Market Orientation Strategy: are business strategies that focus on identifying and meeting the stated or hidden needs or wants of customers through its product mix.
Adaptation Strategy: is defined as the modification of strategies in a business to cope with cultural and demographic differences in the market to make it successful in situations different from originally anticipated.
SME Development: this refers to the growth of an SME with the systematic use of scientific and technical knowledge to meet specific objectives or requirements of the organization.
Return on Investment: this is a ratio that takes the firm’s profit for a given accounting period.
Employee productivity: this is defined as production attributable to staff with the least effort.
Market Share: this is the share of product or revenue held by a firm in a relevant market.
Business Policy: this is defined as plans or principles which guide the thinking and decision making and action of an organization.
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