Background of the Study

Organisations are complex interdependent systems that rely on the environment to grow and survive. They are composed of several small interrelated systems (i.e., departments, units, divisions, etc.) which serve particular goals and objectives. As open systems, organisations interact with the environment to obtain the needed resources as well serve customers with needed products and services. The organisational environment is a complex, multi-faceted and dynamic space [1]. It is the summation of all factors or conditions that affect an organization [2]. The environment may be broadly classified into the internal or external environment. The internal environment is within the control of the management and includes such as product design, organizational culture, and manufacturing (quality); while, the external environment is usually beyond the control of management and includes such as regulatory policies, environmental changes, political influence, suppliers, competitors, etc. [3]. The external environment encompasses factors that are exogenous to an organization [4] and, hence influences an organizational strategy and efficiency. 

Presently, factors such as globalization, technology, tariffs, among others require firms to make decisions strategically [5]. These forces directly or indirectly interact to affect a business organisation. Thus, survival is now linked to the rate of adaptation to such changes in the business environment [6]. Studies have shown that such changes occur in two major dimensions: complexity and turbulence [7]. Complexity is a measure of the heterogeneity in environmental, sub-factors such as customers, suppliers, and technology [7-10]. Turbulence is a state of dynamism in the environment, involving rapid, unexpected change in the environmental sub-dimensions [11,12].  To sustain their competitive force, managers are therefore evaluating threats posed in the external environment [13]. Companies are affected by a multiplicity of factors, such as new regulatory requirements, shifts in market demands, revolutionary technologies and competitors, etc. originating from the external environment must be taken into account in strategy formulation [14,15]. To be successful managers require up-to-date and reliable information on these changes [15]. Thus, practices such as environmental analysis, strategy formulation, implementation, evaluation, and control within firms are therefore beneficial [16]. These practices are applied via strategic approaches that provide a framework for long-term development and the achievement of a firm’s objectives [17]. The thrust of strategic management is on how      organisations react to different kinds of environmental changes [18].

In the Nigerian context, the business environment is highly volatile characterised by rapid regulatory changes and unpredictability [19]. Incessant regulatory changes by governments often create a highly turbulent environment;  which,  poses  difficulties  for  managers  in forecasting demand or anticipating responses to marketing strategies [20]. Major economic indices such as inflation, foreign exchange, access to raw materials, etc.

Hinder most businesses in Nigeria. Policy reforms starting from the 80’s Structural Adjustment Programme (SAP), Companies and Allied Matters Act (CAMA), and corporate governance reforms, among others, have been instituted by the government. The Nigerian Code of Corporate Governance (2019) is regarded as the standard in the corporate landscape in Nigeria. Another significant regulatory reform was the requirement for publicly quoted companies to prepare accounts in line with International Financial Reporting Standards [IFRS] from 2012. In addition, the Central Bank of Nigeria has instituted several banking reforms over the years.  Studies have shown a positive link between adapting to external forces and organizational performance [21]. The survival of a business depends on its interaction with the environment [22]. The relationship between a business and the environment is that of mutuality, that is, the environment exerts pressure on the business while the business, in turn, influences some aspects of its environment [23]. Managers are expected to be conscious of their operating environment and general trends in the economy in strategy formulation and decision-making. Against this backdrop, the paper investigates the strategic impact of external on the performance of Nigerian Breweries Plc. The study, therefore, sought to address the following questions:

• What is the effect of GDP growth rate on the operating profit of Nigerian Breweries Plc.?

• What is the effect of inflation rate on the operating profit of Nigerian Breweries Plc.?

• What is the effect of exchange rate on the operating profit of Nigerian Breweries Plc.?

Review of Related Literature

Conceptual Framework 

External Environment: The word “environment’’ is derived from the French word “Environ” which means “surrounding”. According to Ambundo [8] the external environment consists of remote forces i.e. political, economic, social, technological, and environmental, and legislative as well as industry forces i.e. competitors, suppliers, customers, new entrants, and substitute products. Davis and Powell [20] view the external environment as the set of forces surrounding an organization that have the potential to affect the way it operates. Pearce and Robinson define the external environment as “the factors beyond the control of the firm that influence its choice of direction and action, organizational structure and internal processes”. Capon [21] opines that the external environment comprises of “where the opportunities and threats arise to confront the organization”. According to Duncan the external business environment refers to the totality of factors outside an organization that is taken into consideration by an organization in its decision making. These factors depend largely on the complexity and dynamism of the environment [18].

Harrison defines environment as all the conditions circumstances, and influences surrounding and affecting the development of the total organization or any of its internal systems. He argued that environment contains forces of complexity that are dynamic to varying degrees at differences, and under different circumstances. Atsegbua [9] described environment as the system of abiotic, biotic, and interact and simultaneous to which he adapts and transforms and uses to satisfy his needs. Pearce and Robinson further sub-divided the external environment into three interrelated segments i.e. the remote environment consisting of the political, economic, social, technological, environmental, and legal (PESTEL); the industry environment consisting of companies providing similar products and services; and the operating or task environment consisting of factors in the immediate competitive situation that affects a firm’s success e.g. customers, competitive position, creditors, ability to attract the best staff, supplier reputation etc. Organizations are ecological entities that have mutual relations with other entities in their environment where they operate as open systems and rely on their environment for their input and market for their end products.  

This, external business environment is classified as being stable when it does not show any changes, unstable when it shows relative changes and dynamic when it shows changes continuously [7]. Organizations seek to manage the uncertainty imposed by their interdependence with the environment in two ways: (a) through internal strategies of adaptation and adjustment or organizational design and (b) through external environmental conditions which are important in effective strategic responses by organization. According to Chidambaram and Alagappan [18] business environment is very important to organisations in the following ways: 

Determining Opportunities and Threats: The interaction between the business and its environment would identify opportunities for and threats to the business. It also helps the business enterprises for meeting the challenges successfully. 

Giving Direction for Growth: The interaction with the environment leads to opening up new frontiers of growth for the business enterprises. It enables the business to identify the areas of growth and expansion of their activities. 

Continuous Learning: Environmental analysis makes the tasks of managers easier in dealing with agro-business enterprises challenges. The managers are motivated to continuously update their knowledge, understanding, and skills to meet the predicted changes in the realm of business. 

Image Building: Environmental understanding helps business organizations in improving their image by showing their sensitivity to the environment with which they are working. 

Identifying Firm’s Strength and Weakness: The business environment helps to identify the individual strengths and weaknesses in view of the technological and global developments.

Strategy, External Environment 

Strategies are plans of action which set the scope of an organization’s activities and the main direction that an organization follows. Johnson and Whittington define strategy as “the direction and scope of an organization over the long term which achieves advantage for the organization through its configuration of resources within a changing environment to meet the needs of markets and to fulfill stakeholder expectations”. Thus, strategy may be viewed as an approach utilised by a company to align its internal strengths with external conditions. The biggest strategy influences emanate from the immediate industry/competitive environment. Strategy research comprises three complementary dimensions: strategy process (the way in which strategies are developed), strategy content (strategic actions as the output of the strategy process), and strategy context (the organizational and environmental context that strategies are embedded in). To ensure the survival and competitive advantage of a firm the firm must align its strategy and internal resource capabilities including culture, structure, processes, and resource allocation to demands of the external environmental forces [8]. In the business literature, strategic management comprises managerial decisions and actions that ensure an organisation’s adapts to its external environment to gain competitive advantage. 

The use of environmental scanning in strategic analysis enables a firm to identify and tracking trends that lead to business opportunities or pose threats in the external environment. For instance, Hall and Saias [12] document that strategic choice is related to the current state of an organisation. Additionally, studies on different kinds of organisational structures show that decentralized and bureaucratic structures respond differently to environmental inputs [11,23]. Miller identifies competitive and customer factors to influence strategy. The life-cycle of the industry, type of environment in terms of predictability and stability also affects the type of reaction [19], fast environments generally require structures that enable faster decision-making and/or static environments that demand a ‘once-and-for-all’ strategies with more permanent structure.

In summary the role of environment in influencing strategic choice can be classified in terms of determinism or voluntarism. Determinism claims that environment sets tight limits for strategies, making only one course of strategic actions possible for survival. On the other hand, voluntarism claims that the environment is merely a constitution of strategic actions. According to Agboli and Ukaegbu 4 the interaction of an organization and its host environment can be examined from three strategic perspectives; Firstly, an organization can be viewed as importing various inputs (resources), such as human resources, capital, managerial, and technical resources. These resources are then transformed to generate output which takes the form of goods and services. Secondly, an organization may be regarded as a nexus of contractual relationship. It focuses on the demands and legitimate rights of different claimants such as employees, consumers, suppliers, stakeholders, government, and the community. Thirdly, the organization can be viewed as operating in an external environment of opportunities and constraints. 

Organisational Performance 

According to Salem performance is defined as the “outcomes about work because they provide the strongest linkage to the strategic goals of an organization, customer satisfaction, and economic contributions”. Organizational performance is a measure of the change of the state of an organization, or the outcomes that results from management decisions and the execution of those decisions by members of the organization [13]. Lebans and Euske provide a set of definitions to illustrate the concept of organizational performance: 

• Performance is a set of financial and non-financial indicators which offer information on the degree of achieving objectives and results. 

• Performance is dynamic, requiring judgment, and by using a causal model that describes how current actions may affect future results. 

• To define the concept of performance is necessary to know its elements characteristic to each area of responsibility. 

• To report an organization’s performance level, it is necessary to be able to quantify the results. 

According to Richard et al. organizational performance encompasses three specific areas of firm outcomes: financial performance (profits, return on assets, return on investment, etc.), product market performance (sales, market share, etc.); and shareholder return (total shareholder return, economic value added).

Theoretical Framework 

The study is anchored on the systems theory. Nwachukwu defines a system as “a set of interrelated and interdependent parts arranged in a manner that produces a united whole”. A system can either be closed or open. A closed system does not allow for interactions between elements within the system and its environment; while, an open system allows for interactions both within the system and outside it. Closed systems tend towards negative entropy with the likelihood of decaying due to the absence of exchanges with outside systems. The regulatory environment is part of the external environment of a business which interacts with the business and ultimately determines the performance. 

Empirical Review

Akpoviroro and Owotutu [6] investigated the impact of external business environment on organizational performance. The study utilized the survey research design. The sample comprised of 120 employees from three frozen fish companies. The study relied on primary data; obtained from a structured questionnaire. The data were analysed using multiple regression technique. The result showed that economic and political environment had a positive significant effect on organisational performance.

Eruemegbe investigated the impact of business environment on organisational performance of employees of Union Bank, Nigeria. The study utilized the survey research design. The sample comprised of 39 employees in Union Bank of Nigeria, Lagos branch. The study used primary data; obtained from a structured questionnaire administered. The data was analysed using Chi-Square technique. The results showed that several factors such as (teamwork, work based on contract, supervision based on leadership by example, provision of equipment, communication, love, and belongingness, opportunity to undertake challenging task, identification with goal and overtime) were among factors that affected workers motivation and productivity.

Njoroge et al. examined the influence of external environment on performance of Kenyan State corporations. They examined three dimensions of external environment namely munificence, complexity, and dynamism; while, performance was measured along all the indicators of the sustainable balanced scorecard. The sample consisted of 98 Kenyan State corporations. The study utilised primary data. The results revealed that external environment had a positive significant influence on all the indicators of performance. 

Ajayi [5] examined the impact of external business environment on organizational performance of Micro, Small and Medium Scale Enterprises (MSMEs) in Nigeria. The study relied on secondary data. The study finds from reviewed literature that external business environment (economic, political, legal, socio-cultural, demographic, natural, technological, global and financial) affect MSMEs. Secondly, there exists a relationship between environment and MSMEs performance in Nigeria. 

Gado investigated the impact of business environment on company performance in Nigeria. The sample comprised the 20 most capitalised companies on the Nigerian Stock Exchange. The study relied on secondary data. The data was analysed using Ordinary Least Square and correlation. The results showed that the business environment affects performance of these companies. Specifically, government expenditure and inflation have positive impact while exchange rate and interest rate have negative impact. 

Obasan examined the impact of business environment on the survival of small scale businesses in Nigeria. The study employed logistic regression technique to analyze primary data obtained through a structured questionnaire administered to eighty small scale businessmen and women operators in Ijebu North Local Government area, (Ogun State) South-West Nigeria. The result revealed that the model of logistic regression was able to predict the distribution of 72.15% of the observed values of the dependent variable as factors such inflationary trend; infrastructural facilities accessibility and government policy serve as barriers to business growth and survival. 

Okeyo examined the effect of business environment on Small and Medium Enterprises (SMEs) in Kenya. The study utilised the cross sectional survey research design. The sample consisted of 150 enterprises randomly selected through stratification by business sector. The study relied on primary data; obtained via a structured questionnaire. The data were analysed using descriptive and inferential statistics. The results showed that the business environment had an overall impact on organizational performance. 

Enyioko examined the effect of interest rate policies on the performance of banks in Nigeria. The sample comprised of 20 banks that emerged from the consolidation exercise. The study relied on secondary data; obtained from published accounts of the banks and from the Central Bank of Nigeria (CBN). The data were analysed using linear regression and error correction models. The results revealed that interest rate policies have not improved the overall performances of banks significantly.

Adeoye and Elegunde [1] examined the impact of external business environment on organisational performance in Nigeria. The sample consisted of 3 companies in the food and beverage industry. The study relied on primary data; obtained from questionnaires. The data were analysed using multiple regression analysis. The results revealed that external business environment (political, economic, socio-cultural, technological, etc.) impact on organisational performance (effectiveness, efficiency, increase in sales, achievement of corporate goals etc.). 

Machuki and Aosa investigated the effect of the external environment on corporate performance. The sample was drawn from 23 companies listed on the Nairobi Stock Exchange. The study relied on primary data; obtained from a structured questionnaire. The results revealed that the overall effect of external environment on corporate performance was statistically not significant. 

Research Design

The study adopts the ex post facto research design. The study relied on secondary data sources. The time series data was obtained from the CBN statistical bulletin, the World Bank –World Development Indicators, and annual report. The time series duration was from 2005 to 2018. 

Description of the Case-Study

The case study Nigerian Breweries Plc. was established in November, 1946. The company commenced operations in 1949 in Lagos with a single product line ‘star larger beer”. As the company expanded, it established a brewery in Aba in 1957 and Kaduna in 1963. In 1982, another brewery was established in Ibadan and in 1993 in Enugu, and, finally in October 2003, the company established its sixth brewery, sited at Ameke in Enugu. Therefore presently, the company has six brewing plants in Aba, Kaduna, Ibadan and Enugu and offers a wide variety of products, such as Gulder, Heineken, Maltina, Legend extra stout, Amstel, Climax, etc.

Methods of Data Analysis

The data were analysed using descriptive and inferential statistics. Descriptive statistics comprised the mean, median, standard deviation, skewness, kurtosis, and the Jarque-Bera statistic. The inferential statistics was used to validate the hypotheses. The study employs multiple regression technique to help determine the association between the dependent variable and independent variables. The hypotheses were tested at 5% significance level.

Model Specification

In order to ascertain the relationship between external environment and performance of Nigerian Breweries Plc., the following functional relationship was expressed as follows:

PBT = f (GDP, INF, EXCH)

From the above function, the following testable models were derived:

PBTt = β₀ + β₁GDPt + β₂INFt + β₃EXCHt + εt

where,

GDPt     : Gross Domestic Product for the time period (2005-2018)

EXCHt  : Exchange rate proxied using the real effective exchange rate index (2010 = 100) for the            time period (2005-2018)

εt           : Error term

β₀               : Constant; and

β₁ - _β3      : Coefficient of the parameter estimates

INFt      : Inflation proxied using the Consumer Price Index (annual %) for the time period (2005-2018)

Data Presentation and Analysis

The data was analysed using the E-Views software version 9. The descriptive statistics of the selected organisational performance variable and external environmental indicators is shown in the Table 1.

Test of Hypotheses

The following hypotheses were formulated and tested in the study:

Ho₁:  There is no significant effect of GDP growth on profit before tax of Nigerian        Breweries Plc.

Ho₂: There is no significant effect of inflation on profit before tax of Nigerian                Breweries Plc.

Ho₃: There is no significant effect of exchange rate on profit before tax of Nigerian      Breweries Plc.

The output as shown in Table 2 above shows a good fit for the model; the R-squared values was 85.9 percent (approximately 86%). This suggests that about 86% of the

Table 1:  Descriptive statistics of the variables 

Source: E-Views 9.0 Output, 2019

Table 2:  Ordinary Least Squares analysis output

Source: E-Views 9.0 Output, 2019 

variation in PBT is explained by the explanatory variables, i.e., GDP growth, inflation and exchange rate. The overall statistical significance of the model is evaluated using the F-statistic (16.288); this, value is significant as p <0.05. The individual effect of each explanatory variable is evaluated using the t-statistic and the associated p-value. 

The t-statistic for GDP growth was 6.241 and p-value of 0.000; this suggests that GDP growth had a positive significant effect on PBT, within the time period of the study. 

Thus the null hypothesis is rejected for hypothesis one and the alternate accepted, ‘there is a significant effect of GDP growth on profit before tax of Nigerian Breweries Plc.’.

The t-statistic for inflation was 3.696 and p-value of 0.006; this suggests that inflation had a positive significant effect on PBT, within the time period of the study. Thus the null hypothesis is rejected for hypothesis two and the alternate accepted, ‘there is a significant effect of inflation on profit before tax of Nigerian Breweries Plc.’.

The t-statistic for exchange rate was -0.570 and p-value of 0.584; this suggests that exchange rate had a negative non-significant effect on PBT, within the time period of the study. Thus the null hypothesis is accepted for hypothesis three and the alternate rejected, ‘there is no significant effect of exchange rate on profit before tax of Nigerian Breweries Plc.’

The study examined the strategic impact of external environment in an organisation. The study utilised time series data from the CBN statistical bulletin, the World Bank –World Development Indicators, and annual reports of the case study company to model the relationship between profit before tax, GDP, inflation, and exchange rate. The results showed a significant effect for GDP growth and inflation; but, a non-significant negative effect for exchange rate at 5% significance level. Hence, the study concludes that external environment has a strategic influence on the performance of Nigerian Breweries Plc. Based on this; the study recommends that managers be proactive at tackling uncertainties in the external environment. Managers should be innovative and customer-oriented to ensure survival and gaining a competitive advantage. Managers should periodically evaluate opportunities and threats in the external environment and develop strategies to adapt.

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