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Posted By: Jessica Augustin | 29 Nov 2017

Why Businesses fail

 

 GOING OUT OF BUSINESS?

There is a huge difference between failing while doing something the right way and

failing because you jumped in unprepared for the challenges ahead.

Top 5 reasons on failure & possible solutions!

 

  Ever wonder why even with a great idea your business failed or why everything was going great until somewhere along the line things went wrong or why you can’t seem to make returns on your investment or why new entrants are doing better than you in the same industry and have driven you out of business?

According to Bloomberg, 80 percent of businesses fail within the first 18 months of start-up. On the outside, the one reason we associate with business failure is that the business could no longer its operations or in simple terms, ran out of money. But on a broader scope, the failure of any business results from a build-up of bad business decisions and mistakes, which comes from under-looking or over-looking both critical or small aspects of the business from its foundation. When business owners assume some areas of their business such as effective marketing as too demanding because it requires too much input or when they assume that some areas such as cash flow management are not relevant enough because the aim of the business is to yield profit nonetheless. A lot of business founders are so excited about their ideas and its prospects as they imagined that they don’t pay attention to a lot of relevant details. There are so many reasons out there as to why businesses fail, from blogs by failed business owners to academic journal based on empirical evidence. One thing I can deduct from all the information out there is that businesses fail for one simple reason, “Bad Decision-making”. From entering a market that has no need for your product, ineffective marketing and having the wrong team, running of money to poor leadership decision, poor communication with customers, poor management finance, overreaching/overachieving attitude, owner’s ignorance, poor partnership relationship, poor location and the list is endless, every reason that contribute to the doom of your business was as a result of bad decision. For example, you make a decision to be complacent with your competitors and therefore fail to analyse and recognize your own strengths and weaknesses, or the decision to go with what you think everyone is doing and therefore not have a clear value proposition that would help to communicate your product differentiate and worse case is that you don’t even work on differentiating your product to stand out. The decision to focus less or managing your finance or get assistance from someone who could help, the decision to spend more on fixed overheads because you feel ‘packaging’ your business is more important than the business itself, these and many more reason arise from a direct or indirect decisions about your business made by you.

According to the Entrepreneur  Middle East, in the first year, 20 percent of businesses fail, in the fifth year, 50 percent and after ten years, 70 percent of businesses fail.There are different statistics for reasons where business fail and different percentages of a business that fail given a time period, but one thing they all almost have in common is that about 80 percent of businesses fail in their first five years.

SMEs are recognized as the backbone of many countries’ economy. In 2013, a study by the department of business innovation and skills – UK, showed that SMEs represent 99.9 percent of private sector businesses and employs an estimation of 14.4 million people which comprises of 59.3 percent of UK’s private sector employment. The percentage of small businesses to all businesses in the US is 99.7 percent that is, 28.8 million small businesses in the US alone. In Dubai, SMEs are seen as the backbone of its economy characterized as consisting of 95 percent of all firms registered in the Emirate, 42 percent of the workforce and contributes 40 percent of Dubai economy. How much SMEs contribute to a country’s economy in terms of employment only is very significant and a very good reason to continue to investigate the reason a lot of them don’t last long and to find possible solutions and making the information available.

It is very important that I emphasize that not only small businesses experience failure. In fact, there are a lot of big companies that no longer exist due to bad decisions accumulated over the years of their operation, the prize of which they paid in very expensive bankruptcy procedures. Companies like Enron, Northern Rock Bank, Arthur Andersen, Lehman Brothers and so on are just a few examples of multi-million dollar companies that no longer exist even after more than 20 years of successful business operation.

As I mentioned earlier, there are so many reasons why businesses fail, however, there are some very common reasons that both failed business founders and business consultants agree to be top reasons why business go under.

Top 5 reasons for failure

The first five common reasons why business fail on which this series on why businesses fail will be based on, are:

Not serving a market need.

Running out of finance.

Not having the right team.

Underestimating your competition.

Pricing issues.

                                                                       

Other contributing reasons

Some other common reasons why businesses fail are:

Ignoring to communicate with customer/ No customer engagement

Poor location

No proper product differentiation

Having the wrong team

Over-expansion/expanding too fast

Poor marketing/ no website or social media presence

Lack of feasible business model

Poor leadership/management

Wrong partners

Instead of discussing briefly on these reasons and highlighting solutions here and there, I would take a different approach and make a series on each reason providing information that would well enough answer all your questions regarding each series backed up with facts, examples, and solutions.

No market Need? How Lack of Market Research often gets the shutters down for good

For your business to succeed, you have to be solving a particular market need.  Your idea may seem like one of a kind and the best there is but, if it fails to satisfy a need then your business is bound to fail before your product hit the market. Many business owners believe their idea is so wonderful that their next course of action is to create the product, display it to the world, and wait for the money to roll in. However, this usual misconception is a total startup error and killer. It is easier to give customers want they want than convince them that they need something especially when they have to pay for it. In this context, business owners may have put emphasis on what Steve Job said about people not sometimes knowing what they want until you show them that they do. This may to have worked for some businesses but the percentage is very low in comparison with the total number of businesses that actually follow this path. Market/product fit is so significant that according to Marc Andresen, a famed investor, the lifespan of a start-up can be divided into the before market/product fit is attained and after the market/product fit is attained which once it is attained increases the chance of a remarkable business success. Seeing how critical market and product fit are to the success of your business, the question now is ‘Why do people end up in the market with a product no one needs?’ This question I will answer soon. One important thing is clear and that is if no one wants your product, they won’t buy it and your business won’t survive but still, a lot of start-ups create products that people don’t want with the illogical confidence that they will prove to them otherwise.

 In 2014, an evaluation of 101 post-mortem businesses from founders’ perspectives by CB Insights, showed 42 percent of the companies stated that the market didn’t want what they were offering. The stats above, it shows that almost half of the companies were focused on trying to persuade the market that they need their product rather than just give the market what it needs. Not a close second, but 29 percent did state shortage of cash as a reason for failure. Other reasons such as not having the right team, getting pushed out by competitors and pricing/cost issues will be discussed in the upcoming series.

In a more reason study of founders’ reason on why their business failed, we see that 23 percent of start-ups focus on undertaking problems that are exciting to crack instead of those that actually serve a market need. If I add this to the most voted reason then I would say, if your product does not solve any market  then your then matter how much effort you put, you will not have a viable business model. This is because to work on and have a practical business model, it is assumed that your product will sell and in the case, such as no one wanting your product, that business model cannot be applied.

Solutions

Why do people end up in the market with a product no one needs?

Remember I said that not only small businesses have failed. Big and well-known companies like Ford in 1957 with Ford Edsel, Sony in 1975 with Betamax, Coca-Cola in 1985 in the attempt to create a Pepsi like product, Pepsi in 1989 with Pepsi A.M and 1992 with Crystal Pepsi, and even the great Apple in 1993 with Apple Newton have all also experience product failure as a result of no market need.

No one starts a business with the anticipation that nobody will need his goods or services but a lot of businesses has failed and doomed to fail because of creating a product that does not serve any market need. Back to the question I asked in the introduction of this series, there is some reason why business did create and up till today are still creating products that don’t serve any market need. These reasons we would be looking at now:

Arrogance: Being overly confident about your ideas can turn into arrogance when you are so certain about the uniqueness of your ideas that you don’t concern yourself with looking into the rhythm of the market. A study showed that in addition to 47 percent of arrogance centered business failure due to no market need, 17 percent due to no feasible business model, 13 percent due to the wrong timing of product launch, and 8 percent due to not seeking for assistance from the right people are other failures that arise from arrogance.

Solution:

Calm yourself, tame your overconfidence with the self-effacement receive criticism without becoming all self-justifying.

Wrong timing of the market: Your product not serving any market need could also mean that the product is a few years ahead of its time and the importance and need for it is yet to identified by the market. Some companies like EqualLogic with iSCSI may have enough funding to hold on until the need era, however, not many businesses especially start-ups can handle this problem

Solution:

Do your research, if your product show to be beyond the current market need and shows sign of real growth in the future, do not introduce it to the market just, instead, take your time to develop it and improve its unique features so that when the right time comes, it will be ready for launch.

Being in a hurry: A lot of failed start-ups failed because they thought the ideas to be so brilliant that they just went ahead to create and introduce to the market with little or no planning. Even for existing markets, where demand is high and the market size is large, lack of effective planning put you at a very big disadvantage. A lot of us might think it will take less effort to plan for a new and unique product than for an existing product with many competitors out there. Now, why it is true that you need to take your time and plan effectively from A-Z for both new and existing products, it is important to note that the unlike planning for an existing product where there is more information available, there is little or no information available for your unique idea. This means  you have to fill in the gap not just in the need you think people have for your product but also in information that will communicate the problem that your product is solving. You can’t just hurriedly launch a product into the market based on how unbelievably brilliant you think your idea or how much money you think you have to bring any business idea to life.

Solution:

Your idea is brilliant, yes. You have the funds to finance that business idea, yes. However, calm yourself, do your research, adjust your idea to meet the current market need, work on an effective business model and adjust where necessary.

 

Not captivating enough value proposition: Are there businesses that shut down due to no market need for their product even though there is a need out there? Well, yes, they are, and a very common reason for this is because these businesses don’t have a clear, precise and captivating value proposition that would make buyers truly commit to purchasing their products. It is very possible for a business to slack and fail if its market audience doesn’t understand the problem it is trying to solve. No one would buy a product whose value they don’t understand, I know I wouldn’t.

Solution:

If your business is on the verge of shutting down as a result of no market for your product, then maybe you ought to revisit your value proposition and examine if you are communicating and clearly in captivating approach the value of the problem your product solves.

Wrong target market: Similar to lack of proper and clear value proposition, there are businesses out there that failed, are failing and are likely to fail because they are marketing and push their product to the wrong market audience. When you have a business idea you must first among other things segment your target market. You can’t just create a product and push it into the market for just anyone to find, or assume that this particular audience needs it better than others. Just like it is easier to give the market what it wants rather than persuading that otherwise, it is also easier to sell in a market that needs the solution your product offers than to persuade another market that your product can solve a problem they don’t have.

Solution:

Once again, research is very important. Ask questions to find out the type of people that are possibly interested in the value of your product, modify your product and direct your marketing efforts to attract your target market.

Very small market size: It is not all the time you hear no market for this or that product that it means that there is literally no market at all. It could also mean the that the market size is significant too small. I am not saying that having a product that serves a niche market will lead your business to fail, actually serving a niche market displays your uniqueness and creativity and sets you apart from all the hassles in the big market due to tough competition. But when your niche market is very small and spread all over the place geographically, then your new business faces a huge challenge that will require a lot of capital, time, manpower and very little return on all the efforts.

Solution:

If your product is designed for a niche market, you should ensure that the 1 percent of the market your product seeks to serve are geographically spread. If this is the case then you should try to modify your product to serve the 1 percent of the market that is closely located.

 

 

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