What are the reasons behind business failure?
A Guide towards Success
Table of Contents
Executive Summary 03
Major Reasons of Business Failure 04
Reasons for Business Failure Nowadays 06
Solutions for Business Failure 08
Economic Impact Business Failure 09
The business world is becoming more and more competitive with the passage of time and this has led to increase in the number of business failure. Business today has turned into a very tough ask and if not carried out properly is bound to see the exit. Apart from the increasing completion there are various major reasons which have led to the failure of business over the years. Every aspect of business cycle should properly surveyed and be up to date with the changing environment to keep the business running successfully.
It this project we study some of the major reasons behind the failure of business in details along with the common causes of it nowadays. Every aspect has been studied in detail to back an entrepreneur to understand the importance of the same before starting or running any business. We then come across the solutions to such major problems which one should be ready for as businesses today are prone to failure. We also study the economic impact of business failure.
Major Reasons of Business Failure
Every business started is not necessarily being going to be success and researches have shown that 8 out of 10 entrepreneurs, starting a new business, fail within the first 18months which is major 80% of the total number. Failure is something that every person would look to avoid but still have in the back of their mind while starting a new business. Some of the major reasons of business failure are as follows:
Failure to understand market and customers: Understanding the buying behaviour of the customer and a proper study of the market is the most basic study required to be made before starting a new business. Understanding the type of customers for the business and the reason behind buying such things helps in satisfying the customers more (Ucbasaran, Westhead, Wright and Flores, 2010).
Choosing of a low profit business: Even after tedious work at the business place one does not get proper survival assurance may be because of the profits not materialising to an extent to sustain the business. So the requirement is to always choose a business with higher margin of return.
Failure to communicate the product: If the enterprise fails to communicate the value proposition of the product being sold than the sales are indeed bound to drop to some serious low levels.
Inadequate finance: Cash is the king of the business world. Failure of having enough cash to carry the business sales cycle and the downward trends of the market makes the future prospects look bleak.
Failure to adapt or react: This could be failure to react to the rising competition, technology or the other marketplace changes. Every act or process applied in the past is not something that shall always work. Proper adaptations as per the changing market demands and conditions, adaptability of the upgrading and new technology, understanding the changes made by competitors and coming up with something new are few things that should be always looked at.
Overdependence on single customer: If the majority of the profits or revenue is coming from a single customer, then assessment of the revenue sources is required. This becomes more necessary because if the customer moves out of the business or starts purchasing form some other enterprise or shop than the business you are running is surely going to be a failure (Pratten, 2004).
Failure to define the product and services offered: If one tries to do everything for everyone shall ultimately result in failure. Spreading one too thin result in diminishing quality. Excellent rewards are paid for excellent results, which comes from doing something good over and over again.
Poor management: There are many activities under the single word management, like planning, organising, controlling, directing and communicating. A common cause of failure is going beyond management resources or skills (Johansson, 2004).
Improper planning: If the plan is not properly chalked out than the business shall land up nowhere. No clear picture of success shall lead to the worst. For the purpose of growth and success one requires to actively working on his business. As the saying goes, failing to plan is planning to fail.
The above mentioned points make it very clear and obvious that an entrepreneur should make sure that the business he is starting or even a running one needs to be assessed in time and necessary adjustments and changes are to be altered as per their need. There have been some worst business failures globally like the Fashion Café, Flooz.com, The Hit Factory, Betamax, etc.
Reasons for Business Failure Nowadays
Business world is becoming more complex to the rising level of competition and awareness of the consumers. The failure of a business nowadays is becoming common due to the following few reasons:
Survival Driven: The primary motivation in business today has shifted from creating and adding values to merely acquiring wealth. The drive for creating money has surpassed the drive for innovative products. Business failures today have forgotten that wealth is a result of regularly providing solutions to the problems of humanity. Seeking money before adding value has the maximum reasoning for the failure (Harada, 2007).
Inadequate Knowledge: A business enterprise having an entrepreneur with low IQ level in business is bound for a failure. Having inadequate knowledge of business and always looking or money shall add to the reason.
Lack of Focus: Businesses today try to be the jack of all trade rather than concentrating on a particular item. The success or failure of a business depends on how it maximises its strengths. So focusing on others business rather than your one has resulted in failure (Stokes and Blackburn, 2002).
Fear of Failure: The business on the path of failure never launches out fearing failure, losing money, being called crazy, etc. If a business averts from taking risks than fear shall creep in and failure shall be the result.
Lack of Vision: Business units who do not for see the future and are just short-sighted and more likely to be on the path of destruction. The entrepreneur needs to understand that what should be done today to gain benefits tomorrow. Businesses which are not thinking about the future shall be short lived (Bates, 2005).
Poor Money Management: Business having extravagant entrepreneurs who are wasteful and spending money are the ones failing nowadays. Spending without proper categorisation of expenses has led to the same. Fewer amounts should be spent today, unnecessarily, to have a better future tomorrow.
Insecurity: There is always an upper limit on what an individual can do alone. For this purpose teamwork is very essential. People who do not accept the help of others or where the individuals are empowered too much surely turn out to be a failure.
Adding to the above mentioned points are also few extra reasons like impatience, expectation of massive growth immediately and not being prepared for the future are others. Apart from the above mentioned reasons business may also fail as per the reasons stated in the diagram below:
Solutions for Business Failure
Business entrepreneurs repeat the common mistakes to doom a business and as discussed above, regarding the causes of failure, we further discuss the solutions to those functions. They are:
Solution to Poor Market Research: To avoid the scenario that arises due to poor market survey can be solved to some extent through full-scale market analysis, setting of web monitor system and proper collection and assessment of data of their target market. Finding the main players, studying the price comparison and market performance of each competitor, conduct customer sentiment analysis, etc. could help in overcoming the problem.
Solution to Failure to Listen to Customers: The best way to be informed about customer needs is to listen to the customer and their buying habits. Finding the trends that they follow and also to get plugged to their challenges in daily life are also possible solutions. Getting feedback of the customers on social media and web forum also benefits the business.
Solution to Lack of Innovation: Business units are require to monitor the latest technology available in the market to see what is coming the future to create chances for fighting for survival in the next wave of innovation. This also somewhat finds the solution to the problem of future thinking.
Solution for Lack of Profit/ Sales: The entrepreneur is required to grow the number of sales opportunity at hand also monitor events like new investments in plants, new product launches, new acquisitions and contracts, getting personally in touch with the R&D (Politis and Gabrielsson, 2009).
Reduction of Costs: Proper categorisation of the expenses and meeting the necessary ones ahead and curtailing the lesser required ones shall help in reduction of costs (Rerup, 2005)
Thus, with the help of the above mentioned solutions businesses are more liable for surviving tough situations and prevent itself from failing.
Economic Impact of Business Failure
Business failure affects the business owners but also impacts the social and economic aspects. Some impact of the same on the economic front is as under:
Reduction in innovation and thus economic growth as business enterprises employ the upgrading technology to innovate something new which adds to the economic growth of the region and the country (Marcella and Illingworth, 2009).
Decrease in competition is a direct effect as the close competitors get an opening to cater the market previous catered by the failed business enterprise and charge higher prices (Van Stel, Carree and Thurik, 2005).
Failure of a business also results in jobless individuals which also is a negative economic impact.
There are also some social impacts that the failure of business has like loss of money for individuals and institutions and for businesses registered on the stock market affect the securities market. Many people lose their jobs and many come associated indirectly also are prone of losing it.
Every business started has always faced the fear of failure to some extent and the entrepreneurs should understand and accept the fact that good management with proper application are facing lesser chances of failure. Like the coin which has two sides, business is also the same and the result may be either a success or failure but understanding the reasons for failure and working on it shall always provide results in favour for the business.
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Harada, N. 2007. Which firms exit and why? An analysis of small firm exits in Japan. Small Business Economics, 29(4), 401-414.
Johansson, A.W. 2004. Narrating the entrepreneur. International Small Business Journal, 22(3), 273-293.
Marcella, R. & Illingworth, L. 2009. Small business failure: the causes and consequences. Paper presented at the 32nd Annual Conference of the Institute for Small Business and Entrepreneurship, Liverpool, UK, 4 November.
Pratten, J.D. 2004. Examining the possible causes of business failure in British public houses.International Journal of Contemporary Hospitality, 16(4), 246-252.
Politis, D., & Gabrielsson, J. 2009. Entrepreneurs’ attitudes towards failure. International Journal of Entrepreneurial Behaviour & Research, 15(4): 364-383.
Rerup, C. 2005. Learning from past experience: Footnotes on mindfulness and habitual entrepreneurship. Scandinavian Journal of Management, 21(4): 451-472.
Stokes, D. & Blackburn, R. 2002. Learning the hard way: the lessons of owner-managers who have closed their businesses. Journal of Small Business and Enterprise Development, 9(1), 17-27
Ucbasaran, D., Westhead, P., Wright, M. & Flores, M. 2010. The nature of entrepreneurial experience, business failure and comparative optimism. Journal of Business Venturing, 25(6), 541-555
Van Stel, A., Carree, M., & Thurik, R. 2005. The effect of entrepreneurial activity on national economic growth. Small Business Economics, 24(3): 311-321
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