Why Companies Fail
According to statistics, 20% of small businesses fail in their first year, 30% in their second year, and 50% by year five; that is to say, a full 70% of small businesses don’t make it past their tenth birthday![1] The age-old billion-dollar question asked by many entrepreneurs and business enthusiast alike is, “What are the factors leading to the success or failure of a business?” Though the success criteria for any business are not clear-cut and differ from scenario to scenario and sector to sector, we find a common pattern emerging time and time again. When analyzed this pattern suggests that building a business that will flourish and span generations is not just an art, nor an endeavor that is left to sheer luck but is also a series of well-coordinated activities that are correlated with the elements of science. This is evident in several examples of business that failed in years past and the many more failing today, vis-à-vis those that have been able to stand the test of time, and their products and services have remained relevant, spanning several centuries even in some cases. And though we cannot tell the future accurately to a large degree, these critical success factors can serve as a guidepost to help distinguish between companies that are on the path to success and those that are, clearly, not likely to make it.
This write-up aims to discuss several causes of business failure, grouped under four broad thematic areas, and recommendations for how these factors can be curbed for business success and longevity.
The Market Factor:
Simply put, the market factor measures whether there is a need for the business (product or service being offered) in the first place. To begin with, this seeks to gauge how the brand will be accepted, given that the market is not non-existent, neither is it too small. Sometimes, even the timing for pursuing a business idea, if too early and far ahead of its time and the market’s readiness–or too late, can contribute to the failure of the idea. We have seen time and time again many entrepreneurs blinded by their passion to launch a business that never took off in the absence of traction. Perhaps, they might have dreamt up the idea from their singular perspective or experienced it personally, but only in a unique use case which is not recurrent across a wider group of potential users. An example is Google Glass: Google first announced their eyeglasses shaped head-mounted display with smartphone capabilities to the public in 2012. The announcement began with a statement of principle: “We think technology should work for you–to be there when you need it and get out of your way when you don’t.” After two years of disappointing sales, it was clear consumers did not need Google Glass. Google stuck to its principle, and in 2015 discontinued the product’s development.[2] Not possessing a firm grasp of what customers need and want, with no clear means to differentiate an offering from the numerous competing products/services on the market, is a fast lane to failure.
Business founders must make sure to verify, if even in the least way possible, whether there is a need for the product or service they are seeking to launch. In doing so, it is key to identify the ideal customer segments as well as indications of whether the time is ripe for the acceptance of such a product/service on the market. Joining a fully mature market too late, as the last but one entrant, after a set of well-established competitors have dominated it, might not earn a venture any significant market share; no matter how much it tries, the best spots have already been taken, leaving no room for success, thus finding a different market to play in is a better option.
An initial step to improving a company’s chances of success is by conducting market research to glean insights and gain a good understanding of the characteristics and behaviors of potential customers in addition to existing market activity and players. Data gathered from the market research feeds into developing customer personas, calculating the total addressable market, as well as aiding to ascertain the chances of success. Creating a litmus test to check whether intended target audiences or related stakeholders are willing to pay for a particular solution, and at profitable rates, is a good means of justifying a company’s pursuits.
After validating their ideas, entrepreneurs and product teams who are poised to succeed are those who focus their efforts in the early days to achieve product-market fit through several product iterations, before launching out on a grand scale, as well as, prior to any subsequent scaling attempts. Many product and business development models have sprung up to address this business need, including the lean startup approach, the design thinking process, and the agile methodology.
In my marketing practice, I have come to accept this axiom having heard it far too many times: “You cannot be everything to everyone.” This goes to emphasize the need to niche down as a business, which implies: having specific products/services, for specific customers, in specifics industries, etc. Knowing your customer well can afford you the advantage of drilling down to hit the heartstrings of your audience, making it easy and much more effective to market and sell to them, which ultimately leads to building a sticky brand. Businesses that have successfully built a strong brand from having a deep understanding of their markets include Apple, Microsoft, Nike, and Starbucks.[3]
Businesses still need to continually watch for market trends, regardless of their stage, so as to spot shifting consumer trends and behaviors, and emerging business opportunities.
The Finance Factor:
Most of us have frequently heard or used the phrase “Cash is king!” Yet this simplistic way of describing the important role finances play in business has eluded many businesses, such that the survival of their organizations has been shortened, because it is not easy to come by money after all.
Among most early-stage businesses that fail, a reason commonly cited by these founders as the cause of failure is the lack of startup capital. This is due to most companies failing to attract the requisite investor interest necessary for the success of their ventures; Only 0.05% of startups raise venture capital.[4] Failing to secure enough funds, counts as business failure and this is partly preventable by making data-backed assumptions to reach more realistic financial models and estimates; any flaws embedded in the financial model can come back to bite a company.
Another factor that hinders the prosperity of businesses is the act of taking on too much debt; this can be very detrimental to the future financial health of any company and potentially lead to bankruptcy.
Every business is fueled by the financial resources it has at its disposal; Therefore, companies that have room to flex their financial muscles can invest in more rewarding business activities such as marketing, production equipment, research and development, patents, hiring the best talent, entering new markets, mergers and acquisitions as well as legal backing, all of which improve the odds in favor of their success, unlike their cash-strapped opponents who cannot compete on the same level.
Cash flow is the lifeblood and oxygen of any business. Whenever a business runs out of cash, it is a sign that the end is near; thus, falling on solid cash flow management practices such as on-time invoicing, timely collection of receivables as well as inventory and purchasing management, will go a long way to rectify the situation.[5]
An example of a business falling prey to the financial instability predator is Toshiba when they failed to resolve their financial struggles after several years and Enron whose stock price fell not too long after the scandal.
From forecasting to bookkeeping, to fundraising, to cash flow management, to financial reporting, every business, regardless of its stage, must put in place sound financial management practices to safeguard its success.
The Team Factor:
An important “P” in business is people. A business’ success begins and ends with the ability of its people to execute collaboratively and progressively. People-related issues can make or break a company! Although all the employees of an organization have a role to play in determining the success of the entire outfit, the survival of the establishment largely falls on the shoulders of leadership: the founding members, top-level executives, and mid-level managers; It is their job to lead by example and empower their teams and the entire organization to give off its best.
Experience in business plays a crucial role in business success; According to data collected from CrunchBase, by these metrics, the more experience a founder has, the better his or her startup tends to perform.[6] It was been found that founders of companies with experience previously starting and managing a business are better equipped to see to the success of the new business even if the previous ventures were not in the same industry.
If the key decision-makers in a company lack the requisite passion, expertise, and network needed to bring the business to fruition, that, obviously, leaves much to be desired. For instance, consider for a moment a plumber thinking of starting an aerospace engineering company. This might sound absurd, but with the right preparation, either by this entrepreneur enrolling in engineering school, or by hiring the best fit staff to take on the more technical roles, and bringing on board a set of capable advisers, the company can be born and grown. Elon Musk is an example of someone who taught himself automotive and space travel to successfully start Tesla and SpaceX, two forward-facing companies.
In forming the founding team for a startup, one needs to seek for others with complementary skills to serve as cofounders–filling in the gap where one is not so strong. Another important factor to look out for in finding partners to venture into business with is team dynamics. There have been many cases where companies broke apart because the cofounders had a character, value, or personality clash; Sometimes even petty squabbles that can be resolved with proper team mechanisms and conflict resolution strategies tear teams apart.[7]
In the early days of a company’s formation, the mindsets, philosophies, and attitudes of the founders go a long way to shape the culture of the company for several years to follow.
Management has a role to play in firmly establishing, communicating, and ensuring organization-wide adherence to company values and culture. If people do not feel a bond and the motivation to work in the company, such a business might not yield optimum results. In the case of a small business, one might assume that team bonding comes naturally, yet this has to be an intentional effort on the part of the team lead. No matter the size of an organization, management has to put in place processes, structures, and policies to foster cohesiveness among the workforce on all fronts, from the top to the bottom of the organization, to drive desired outcomes. Also, are the concerns of employees heard, and is their welfare properly considered? An inadequately trained and incentivized workforce will directly translate into poor work performance, eventually creating an organization that works below capacity. Although poor management practices are very hard to correct, it is a key determinant of business success, a distinguishing factor between businesses that are success bound and the ones headed for failure.
Mismanagement can take on various forms, such as neglecting to constantly elevate and measure progress in an organization’s resources–its people, programs, projects, brands, products, finances, etc. Thus, such an organization is very likely to miss the opportunities for executing appropriately for success.
For a large business, a board of directors can be brought on to serve as a source of checks and balances for senior executives; however, in the case of smaller businesses, accountability might be hard to come by. All is not lost for smaller teams since solutions exist to plug in accountability measures for higher ranking team leads in the form of auditors, coaches, consultants, and mentors; This way, a management problem can be spotted and dealt with before it ever gets the chance to turn morbid. The likes of Bill Gates and Sir Richard Branson have Warren Buffet and Sir Freddie Laker respectively as their mentors. If they had advisers, why can’t you?[8]
Recent examples of companies that faced a downturn due to poor management practices are Toshiba, Volkswagen, and WeWork; They haven’t been the first, neither will they, most probably, be that last to fail to put in place measures to prevent failure in management, be it an issue bordering on illegality, ethics, lack of respect for subordinates and other social vices.
The Planning, Execution, and Adaptability Factor:
This last factor is arguably the most unavoidable, and hence, the most difficult to detect when something of the sort is looming.
Like the popular saying goes, “If you fail to plan, you plan to fail!” Most companies fail not just because they fail to plan feasibly well, but also because they fail to execute according to plan. Even more so, is the least foreseeable form of failure which comes about when businesses, that were hitherto thriving, fail to quickly respond to change while they execute, as well as when they miss the opportunity to adapt, ahead of time, to impending massive shifts.
Even large brands such as Kodak, and Nokia, before its acquisition by Microsoft, and several others have fallen to the trap of failing to look ahead and execute well-timed successful pivots in the right direction, to avoid the catastrophe of investing in a rather “obsolete future”. Microsoft’s sustained leadership in several markets is a classic case of why businesses must adopt the culture of innovation and never resort to resting on their oars. [9]
In Africa, where we largely operate in the informal sector, a plethora of business ventures are not even registered, let alone having a documented plan; Failing to put our thoughts on paper is a huge barrier to our abilities to consistently grow even on a small scale–despite the enormous benefits of business planning we could have enjoyed.
Small businesses should create a business plan with the assistance of experts, very early on in the inception stages. This should inform the action plans to be laid out: objectives, strategies, tactics, organizational structure, roles and responsibilities, processes, policies, standard operating procedures, key performance indicators, business continuity plans, as well as the timelines for executing these plans to achieve the broad company goals. A small business can at least begin with the business model canvas to serve as a mini-plan. Companies that have a strong vision of the future they seek to carve for themselves, who are able to spell it out in a worthy mission, have the best chances to achieve their milestones and arrive at the ultimate destinations they have set for themselves.[10] To list a few of such brands whose successes were propelled by a strong vision from the onset, we can easily pinpoint the likes of Apple, Coca Cola, KFC, Facebook, Tesla and SpaceX.[11]
Small businesses lack the fortitude to recover from tumultuous market shocks and devastating systemic imbalances be it political, economic, social, technological, environmental, and legal/regulatory (PESTEL). A vivid example, still fresh on our minds, is the COVID-19 pandemic; this phenomenon alone will drive a 25% rise in business failures.[12] No single business has been exempted from the impact of this global crisis, and while millions of businesses were temporarily disrupted for some time, a good number of them have permanently shut down.[13] However, the more adequately prepared, resourced, and better-structured organizations were not hit so badly and the most resilient businesses have recovered very quickly, despite lingering economic repercussions for years to come.
Although these factors are somewhat not in the control of business decision-makers, organizations that conduct frequent assessments using proven frameworks and methodologies that form a key component of planning and execution are better placed to withstand the shocks of constantly dynamic market factors. Relying on such best business practices: situational analysis, SWOT analysis, risk mitigation and management, supply chain management, performance reviews, compliance and quality control, disaster recovery planning and research and development, go a long way to tell apart a business that is well prepared for success and one that ill-prepared and not secure. Even larger companies must constantly evolve and embrace innovation to meet the changing demands of the market, and remain relevant in changing times.
Overall, companies that implement a good number of the mitigation strategies intimated above are far well-advanced in sealing the cracks that could lead to the collapse of their companies down the line, as compared to less conscientious players in the world of business.
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[1] https://www.forbes.com/sites/ellevate/2019/10/24/eight-common-reasons-small-businesses-fail/#250988484fbb
[2] https://www.usatoday.com/story/money/2018/07/11/50-worst-product-flops-of-all-time/36734837/
[3] https://www.independent.co.uk/news/business/news/apple-most-valuable-brand-iphone-7-google-coca-cola-a7345501.html
[4] https://www.fundera.com/resources/startup-funding-statistics#:~:text=8%20Startup%20Funding%20Statistics%20to%20Know,-77%25%20of%20small&text=Only%200.05%25%20of%20startups%20raise,status%20of%20%241B%2B%20valuation.
[5] https://quickbooks.intuit.com/in/resources/accountants-and-bookkeepers-accountants-and-bookkeepers/top-cash-management-strategies-to-manage-cash-effectively/
[6] https://mode.com/blog/are-experienced-founders-better/
[7] https://blog.close.com/the-secret-to-successful-and-lasting-co-founder-relationships/
[8] https://thetotalentrepreneurs.com/10-causes-business-failure/
[9] https://www.theverge.com/2012/7/19/3169177/nokia-smartphone-market-future-wsj
[10] https://www.forbes.com/sites/williamcraig/2018/05/15/the-importance-of-having-a-mission-driven-company/#4db7fdd13a9c
https://wmkagency.com/blog/the-importance-of-a-strong-business-mission-and-vision
[11] https://status.net/articles/best-company-slogans-vision-mission-statements-examples/
[12] https://www.commercialriskonline.com/covid-19-to-drive-25-rise-in-business-failures-coface/
[13] https://www.brookings.edu/blog/africa-in-focus/2020/05/19/impact-of-covid-19-on-micro-small-and-medium-businesses-in-uganda/
