What makes a business fail?

March 14, 2018

 

The Bureau of Labor Statistics in the USA reports that 50% of businesses die before their fifth birthday, and more than 70% fail to reach teenage.  Plotting the survival rates for businesses founded in 1995, 2000, 2005, and 2010 it shows that, regardless of when the businesses were founded, their survival follows the same trajectory.

 

This provokes in the mind of any would-be entrepreneur the question, "Why do businesses fail?"

The most common reasons include the following:

 

  1. Insufficient market demand for product/service

  2. Run out of cash

  3. Not the right team with the right passion

  4. Out-competed

  5. Pricing/cost issues

  6. Poor business model.

 

Insufficient market demand

The strategy of "Build it and they will come" works only occasionally, yet it is not uncommon for would-be entrepreneurs with technical skills to invest time, effort, and money in developing products and services that insufficient people want.  Sure, the designers may be convinced that people need the solutions they are offering to problems.  However, most sales are secured because people want the solution.  The logic has to be to find out the problems people have for which they want solutions.  Whilst Steve Jobs' view that "A lot of times, people don't know what they want until you show it to them" worked for Apple - eventually - many a small fortune has been made only after a large fortune has been invested.

 

Run out of cash

The golden rule of business is that "Cash is king" and having insufficient to pay taxes, lenders, suppliers and staff is the surest way of closing the business.  Even businesses whose accounts look solid can run out of cash.

 

Not the right team with the right passion

Every business must coordinate strategy, marketing, sales, product and service development, manufacturing, distribution, human resources, finance, administration, etc., and must excel at those areas that are crucial to its success.  Few, if any, entrepreneurs possess the skills to master a business and must rely on recruiting competent people into their power team.  Here, it is not just a matter of harnessing the right skills, but blending the right skills with the right values and aspirations to align with the mission, vision, and values of the founder.  Whilst values drive behaviour, behaviour also reveals the actual values a person holds, regardless of what is uttered.  A high performance team that does not share the purpose of the business will soon disintegrate in conflict.  In contrast, a team that shares a passion and is motivated to collaborate to fulfil the purpose of the business will inspire their staff to do likewise.

 

Out-competed

Almost every entrepreneur's success results from competing successfully with businesses in some industry addressing some market.  It is not surprising, then, if those businesses take first defensive and then offensive action.  Indeed, capitalism relies on competition for the community to gain the best value for money solutions to the problems they want solving.  If the key strategic question every business must address is "What must we do to continue to thrive in fulfilling our purpose?" then the answer must include how the business will secure and sustain sufficient competitive advantage to thrive.

 

Pricing and cost issues

You may well build it and they may well come, but they will only buy if the price is lower than some threshold of pain.  Similarly, you may well need suppliers, but they will only supply to you above some minimum price.  Between these two is the budget you have available for (1) the variable costs of combining inputs with your know-how to create and deliver products and services; (2) the fixed costs of supporting the business; (3) the costs of taxes; and (4) the cost of capital.  The financials are often as complex as the product design, and may be far less interesting to the would-be entrepreneur.

 

Poor business model

The business model is how the business creates and delivers value to those who want it at the price they are prepared to pay while allowing the business to extract sufficient value to allow it to thrive. 

At its simplest, a business must employ distinctive competences to deploy distinctive resources to execute unique processes to create and deliver a value proposition to its market that is differentiated from its competitors in such as way as to deliver profitability that is superior to its competitors to enable it to improve these components continuously and thereby sustain its competitive advantage.  Any deviation from the italicised words renders the business vulnerable to all the ailments listed above.

 

 

 

 

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