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Why do Businesses Fail & All that you can learn from Failed Businesses

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If you look in your closet, you will surely find a camera with a Kodak film. Chances are you still have cassettes stashed somewhere, many bearing the mark of His Masters Voice. But these iconic brands are extinct today. This makes us ask the question, Why do Businesses Fail & All that you can learn from Failed Businesses?

So if you are witnessing failing businesses all around you, please note that failed businesses are much more commonplace than we think. While Fortune 500 company bankruptcies make more headlines, small businesses go belly-up every day. If you look closely, you will find your favourite eatery may be gone, and you may no longer be able to locate the ice cream place from your childhood.

Percentage of Businesses that Fail

Well, the success of a business depends on many factors. Similarly, failure of a business is also varied. If you search for statistics on what percentage of businesses fail you will find numbers between 70% to 90%.

  • Entrepreneur reports that 7 Out of 10 Businesses Fail Within 10 Years. (1)
  • Forbes reports that 8 Out Of 10 Businesses Fail. (2)
  • INC reports that 96 Percent of Businesses Fail Within 10 Years. (3)
  • Harvard Business School reports that 3 Out of 4 Start-Ups Fail. (4)
  • Wall Street Journal reports that 3 Out of 4 Start-Ups Fail. (5)

Why do Businesses Fail

Starting a business is easy. But turning your venture into a successful business is no easy task. There is also no single reason why businesses fail. In most cases, it is a combination of several factors- and all of them are interconnected.

Let us look at some of these factors to understand why businesses fail:

Leadership failure, leading cause why businesses fail
Leadership failure, leading cause why businesses fail

1. Leadership failure

Almost in every case, this is the main reason why a business fails. A company’s nature is reflected in its leadership.

Your business will suffer if you cannot handle crises, manage your staff, formulate a vision and if you lack the determination to make it work.

If there is infighting within the management or lack of coordination between them, it will lead to chaos.

The problem with poor management is that it eventually trickles down and pervades every aspect of your business.

Before you know, you are either on the way to bankruptcy or end up being loathed by your staff who depended on you for leadership.

Look no further than Vijay Mallya for a glaring example.

2. Lack of uniqueness in product or service

Any product or service you offer will always face tough competition. In order to survive and flourish, it is necessary to identify a demand gap in the product market. Finding your own niche is important, as it sets you apart from the rest. This is the first step towards brand building.

Many startups fail because they become just another clone in a market crowded by providers of the same products or services. Look at fashion retailing websites- almost every day a new one crops up, but not having anything unique to offer forces them to shut down or be taken over by a competitor.

3. Failure to understand the customer’s needs

A business is doomed to fail if it does not understand what its customers want. Your brand value is linked to how well you know your customers. If you cannot understand your customers, you cannot provide them with their desired products.

A good example for this is Christian Siriano. In the fashion space, while other designers were turning away plus size (or even average size) women, Christian Siriano embraced them with open arms. Siriano is known to make clothes that flatter his customers, instead of indulging his fancies with his designs. His label is 50% plus size.

The result is that Siriano is now the reigning red carpet king, becoming the go-to designer for celebrities who do not have a thin, modelesque physique. On top of that, he has collaborated with many mass retailers to make his clothes more accessible and affordable for women from all classes. In 2018, his label reported that it has tripled its business since its launch in 2008.

4. Failure to innovate

The world is always moving forward, and so should you. Innovation is a must if you want to beat the competition. This relates to both your products and your business model. Adapting new technologies and structures is essential. A viable product is one that responds to the needs of the time.

Nokia became extinct because it refused to shift from Symbian. (6, 7) While the rest of the world adapted to Android and iPhones (8), Nokia was stuck with an outdated technology that made its products unviable. It failed to adapt to the emerging internet boom, and as a result, vanished fast from the market.

5. Improper cash management

This is the most vital part of any business. 82% of businesses fail due to bad cash management. Poor cash flow management is the result of failed leadership, poor management, declining product market and failed innovation. A good business owner keeps track of where the money is going, down to the last penny.

You should be aware of the financial status of your company. Every decision you make will be dependent on this information. Otherwise, you will end up spending more than you earn, or undertake projects which you cannot afford to. Pretty much every spectacular business failure has been due to bad cash management. Once a popular name, Xerox today is extinct because of poor cash management. (9, 10)

6. Fast expansion without planning

Ambition is necessary for a business owner, but being over ambitious isn’t. If you expand too fast, you will bite off more than you can chew and eventually, choke on it. Expanding your business needs careful consideration of your finances, business model, human resources and market survey. Expansion needs to be planned out carefully and be implemented methodically.

Without considering these factors, if you expand into different territories or expand your portfolio, your business will guzzle up cash fast, but there is no guarantee that you will generate enough revenue to offset it. The jeans brand Spykar is a glaring example of the dangers of aggressive expansion. (11, 12)

7. Inadequate marketing

For any business, marketing is crucial. It is the method via which you take your brand to your customers. It is not only important that you tap all the relevant channels to do so, but also that you have a strong message that will pursue your customers to go for your products and services.

Pepsi’s Kendall Jenner advertisement was one of the biggest marketing fiascos of recent times. It reeked of cultural appropriation and was pulled just a day after facing a severe backlash. Similarly, many companies are losing out on potential customers because they do not pay attention to marketing their products online or do not engage with customers via social media. (13, 14)

8. Not having a contingency cushion

Always remember that while running a business, you will face both good and bad times. Hence, it is best to prepare yourself for any temporary setbacks by accumulating a cash cushion that will soften the blow when you hit a roadblock.

Many businesses closed down during the recession of 2008. It started with the bankruptcy of two big banks. However, many businesses survived and came out of it and are flourishing now.

9. Bad human resource management

Business is a human enterprise. So, it is important that you pay as much attention to the people in your business as your customers. Finding the right person for a job is just a part of it. You have to be attentive to your employees’ needs and train them such that they bring their best to their jobs.

A lot of restaurants suffer from high employee turnovers. If you cannot retain your employees, they will leave voluntarily or be poached by rivals. There is a popular saying that people do not quit their jobs, they quit their bosses. Be sure that you do not turn out to be that boss.

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What can you learn from Failed Businesses?

It is important that we study and learn from failures. When businesses fail, it gives us an opportunity to understand what went wrong, and thereby determining what to do to avoid the same fate, should such a thing happen to you. Luck does play a big factor, but business owners can take a few steps to ensure that their projects survive.

1. Prepare yourself for the role

Take classes, read up, learn about your field, get down for hands-on experience, study your rivals and market leaders—do whatever it takes so that you become a business leader. Remember, that any business is built on the vision and skills of its founder and leader. If you fail at your job, it reflects on the whole company and will eventually weaken its foundations.

2. Build your brand name and value

Know the market and identify your customer. You must find a way to distinguish yourself from the crowd. Position your brand in such a way that it fills in a demand gap. Build up brand loyalty by providing good and unique service. Plan long term, so that you do not lose your customers to your competitors.

3. Ensure good cash management

This means that your business should be well planned and have a good delivery model in place. You should be able to trace every dime that goes and comes into it. Use updated accounting software, minimize costs, update your technology, stop leakage and be vigilant. This will make sure that you have a safety net in place to tide your business over when times are difficult.

4. Ensure good marketing

Do not leave anything to chance, and make sure that you have positioned your brand across every channel. Get your message across to the right audience, and you will be counting profits. Do not go for cheap tricks or predatory practices.

5. Value your staff

If you want to run a successful business, find the right people. If you have a well trained and dedicated staff in place, your worries will go down. Train your employees, be attentive to their needs and create a good business environment so they thrive. If you inspire loyalty in your employees, they will give their best to make your business shine.

So, are you on the right track? Learn from the failures of others so that you can avoid being another casualty in this game.

FAQ

Q1 What percentage of small businesses fail?

As reported by various leading publications and business schools, 70% to 90% of small business fail.

Q2 why do most businesses fail?

There is also no single reason why businesses fail. In most cases, it is a combination of several factors- and all of them are interconnected.

1. Leadership failure
2. Lack of uniqueness in product or service
3. Failure to understand the customer’s needs
4. Failure to innovate
5. Improper cash management
6. Fast expansion without planning
7. Inadequate marketing
8. Not having a contingency cushion
9. Bad human resource management

Q3 What percentage of new businesses fail?

Almost 7 out of 10 startups fail.

Q4 How many small businesses fail?

As reported by various leading publications and business schools, 70% to 90% of small business fail.

Q5 What percentage of businesses fail?

If you search for statistics on what percentage of businesses fail you will find numbers between 70% to 90%.

  • Entrepreneur reports that 7 Out of 10 Businesses Fail Within 10 Years. (1)
  • Forbes reports that 8 Out Of 10 Businesses Fail. (2)
  • INC reports that 96 Percent of Businesses Fail Within 10 Years. (3)
  • Harvard Business School reports that 3 Out of 4 Start-Ups Fail. (4)
  • Wall Street Journal reports that 3 Out of 4 Start-Ups Fail. (5)

Q6 Why do small businesses fail?

There is also no single reason why small businesses fail. In most cases, it is a combination of several factors- and all of them are interconnected.

  1. Lack of uniqueness in product or service
  2. Failure to understand the customer’s needs
  3. Failure to innovate
  4. Improper cash management
  5. Inadequate marketing
  6. Not having a contingency cushion

References:

  1. 10 Reasons Why 7 Out of 10 Businesses Fail Within 10 Years. Entrepreneur.
  2. Five Reasons 8 Out Of 10 Businesses Fail. Forbes.
  3. Why 96 Percent of Businesses Fail Within 10 Years. INC.
  4. The Venture Capital Secret: 3 Out of 4 Start-Ups Fail. HBS.
  5. The Venture Capital Secret: 3 Out of 4 Start-Ups Fail. Wall Street Journal.
  6. The Strategic Decisions That Caused Nokia’s Failure. Insead.
  7. Symbian. the most successful failures in tech history. Techcrunch.
  8. 6 Reasons Apple Is So Successful. Time.
  9. Big Companies Can’t Innovate Halfway. HBR.
  10. The Lesson That Market Leaders are Failing To Learn From Xerox PARC. Forbes.
  11. From success to squeeze: Too much growth in quick time pulled Koutons, Spykar, and Gini & Jony down. The Economic Times of India.
  12. PE-backed apparel retailers struggle with heavy debt. Mint.
  13. Pepsi Pulls Ad Accused of Trivializing Black Lives Matter. New York Times.
  14. Pepsi advert with Kendall Jenner pulled after huge backlash. The Independent.
  15. Here’s why small businesses fail. Business Insider.
  16. Five Reasons 8 Out Of 10 Businesses Fail. Forbes.
  17. Why Companies Fail—and How Their Founders Can Bounce Back. HBS.
  18. A Harvard Professor Analyzes Why Start-Ups Fail. NewYork Times.

Branding & Digital Marketing Consultant and Founder of BrandLoom Consulting (A $1m startup). Help companies generate more revenue through digital marketing and branding. Growth Driver of Large Global Companies and Successful Startups. Built Sustainable & Profitable Businesses for over 100 Brands during 18 years long global career. Speaker at CII, CITI, ASSOCHAM and several prominent Industry Forums. Covered by TOI, ET, The Hindu, Silicon India, The CEO and many publications.

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