We can write about business success, however we need to learn from business failure. Once I mentioned at a business forum that I study “failure”. The look I received was of shock and puzzlement. Why would you want to study failure and not the successes of entrepreneurs like Steve Jobs? Obviously they missed the point. Yes, studying the successes of Steve Jobs is important, but equally important is to study failures of start-ups and mature companies to identify missteps, symptoms, causes, and the reasons companies came and went. Remember Steve Jobs studied the business failure of Apples’ previous management upon his return to the company. Think of the company he left us with.
Think about it, NASA studied its mistakes to make corrections with the space shuttle program. Pharmaceutical companies and financial services companies study product design failures to make improvements, and hospitals study their service offering to improve the quality of healthcare service. Successful companies create value for shareholders, customers, and other constituents from learning from business failure.
Knowing how value was destroyed will make you a better business owner, investor, and stakeholder. Studying the phenomenon of entrepreneurial failure can create value, a return of investment, by understanding the fundamental causes behind business breakdown. Studying business failure should be performed because starting the business strategy process.
Business failure does not end in bankruptcy liquidation. In the event a company declines in value and is considered worthless, the enterprise failed from the perspective of the owner. However, the business or the assets of the business in the hands of others may result in the re-creation of value, jobs, and new business in the eyes of customers, suppliers, and employees.
When discussing business failure, I mean that the business has fallen short of its goals, thus failing to satisfy investors’ expectations. Business failure involves the loss of capital and the inability to make the business successful. With the fall in revenues and/ or the rise of expenses, the company cannot continue to operate under existing ownership and/or management.
Learning from business failure can be viewed from different perspectives.
We can start at looking at business ecology from the business life cycle perspective. Although the business life cycle has various definitions and stages, fundamentally the business life cycle can be viewed from birth (startup), growth (emerging), maturity (stable), decline (distress), and either failure (insolvency) as well as revival (renewal). Different causes of business failure depends generally where the organization is located on the business life cycle.
A failed business rarely moves from prosperity to bankruptcy in one step. Each step has diagnostic value. Business operators, adviser, directors, investor will learn from studying failure.
Early Stage—In the early stage of business failure, companies operate with inefficiencies that show a lack of synergies in production and distribution. Customers complain about quality of products and services. Both revenues erode and margins suffer.
Intermediate Stage—In the intermediate Stage of business failure, the trouble in production and distribution are severe. For manufacturing companies, inventory build up or material shortages are quite noticeable. Employee morale is low. Rumors about the company’s problem spreads. Top employees begin leaving as “the cream” search for green pastures.
Late Stage—In the Late Stage of Business Failure, both management and reporting systems breakdown. Vendors are requesting cash for delivery.
Speaking about startups and young companies, start-up and young companies face different issues than older mature companies. The primary causes of start-up company failure are lack of resources, competence, and inexperience.
Financial resources–The inability to obtain financial resources necessary to develop or maintain an operational synergy is a problem. For young companies the lack of financial endowment tends to be the number one cause of business failure. The deficiency on financial resources prevents the company from developing the operational infrastructure (systems, processes, and people) and applying an adequate strategy to succeed because of the lack of sufficient working capital either in the form of internal cash or line of credit. To create a sale, an organization needs working capital to pay for the revenue generating process (payments to vendors, employees, overhead, etc.) until cash is received from the sale. And there is a point where bootstrapping is no longer sufficient to execute the strategy.
Business competence and management–Subject matter experts tend to establish new companies on the belief that making an entrepreneur endeavor work is not as hard as people think. Such beliefs are furthest from the truth. The inexperience and lack of business acumen is the principle factor of young company failure. Studies have shown that the deficiencies in the competence of management negatively influenced the direction of young companies toward business failure. Many subject matter experts lack the acumen about the complexity of business. Both not understanding marketing and finance contribute to the business demise.
For mature companies, business failure generally is traced to the inability to adapt to the changes of the environment. The company ignores changes in economic conditions, changes in competitive conditions, changes in technology conditions, and changes in societal conditions. When the company is in decline, in large part management tends to be “in a state of denial”.
After the financial crisis and the current government budget problems, economic conditions shifted for the entire business landscape. As an example with the U.S. federal government, the largest buyer of goods and services, cutting back on contracts, large defense contractors and other government service providers is forced to reduce employment and expenditures. Companies that primarily depend on government contracts the cutbacks are starting to impact the bottom-line.