Business Failure Case Study: Top Ten Reasons Why Businesses Fail
June 14, 2019
Business Failure Case Study: Top Ten Reasons Why Businesses Fail
Business Failure Case Study…Every year, many businesses are set up. Startups are considered to be firms that are less than one year old. However, out of every 10 entrepreneurs who started new businesses, every 8 fail within the first 18 months. To capture it more accurately, of all small businesses started in the US in 2014, 80 percent made it to the second year (2015); 70 percent made it to the third year (2016);62 percent made it to the fourth year (2017);56 percent made it to the fifth year (2018).
The implication of this is that you may not actually define your business as being truly successful until at least after the first five years. While you wait for the first four years to be exhausted, here are the top five reasons why new businesses fail within their first five years of being in business.
From the most recent market survey, businesses fail more because the market has no need for them. Consider the case of Zappos, the world’s largest online shoe store, with annual gross sales of $1 billion. When Founder Nick Swinmurn started, he was confused about whether customers were willing to buy shoes online. Swinmurn started with an aggressive experimentation campaign, collecting pictures of shoes from local shops, designing a very simple online shop with them and launching online shop into the market. Zappos’s initial experiment provided a clear, quantifiable outcome: it is either a sufficient number of customers would buy the shoes or not. In fact, the company became so profitable that Amazon.com had no option but to acquire it for a whopping $1.2 billion in 2009 to ease off the competition it was facing from Zappos. In summary, if it had ignored market research, ignored simple, cost-effective product experiment and waded through unclear waters, it would have been a different story for Zappos. Apart from conducting market research, you can also capture the consumer demand pattern of the products through simple, cost-effective market experiments.
2. You May Have Got A Very Wrong Team For Your Business.
A lot of attention at the foundation of the company is focused on getting the business started in the first place. In fact, of all the reasons why startups fail in their first five years, the research shows that 23 percent of new businesses failed because they did not have the right team. In 1993, when Philip Greenspun launched the ArsDigita, a US web development company, he was hoping that the IT startup wasn’t just going to be another startup nearby; he was brimming with hope that he had identified an opportunity in the marketplace long before the major players such as IBM, Microsoft and Oracle did. The Open Source toolkit (the ArsDigita Community System — ACS) for building database-backed community websites was the work of ArsDigita. Such was the power of ACS that within a relatively short space of time, the company’s client list included Hewlett Packard, AOL, Levi-Strauss, Oracle, and Siemens.
- The Market Has No Need of The Products or Services Yet.
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Following the dotcom crash in 2000, General Atlantic and Greylock invested around $35m in the company (30% of the issued shares) and held two of the seven board seats. Then within a year, a new CEO was recommended by the Venture Capitalist Firms. He had a background in IT services consulting but had no experience in software product development. The VCs also appeared to have difficulty understanding the challenging personalities, not only of the founders but also key software engineering staff. Several years after the company went dead, Many of those who worked for ArsDigita, as well as product users, described the young organization as having enough VC capital to develop itself but was left in tatters. Much blame would go to the choice of a new team member.
3. The Business Simply Ran Out of Cash
Most new businesses fail in their first five years of existence because the business simply ran out of cash. In fact, this constitutes 29 percent of the reasons why startups fail. Jeff Bezos was dead broke, barely a year after Amazon.com was birthed in 1994. According to Eric Dillion who was a stockbroker for Smith Barney in Seattle, Jeff Bezos was ‘out of his personal funds…out of his family ability to fund the company, and he was completely going out of money in 25 days.’ Without the intervention of the venture capitalist firm, General Atlantic Partners, Amazon.com would have had no option but to pack up and go home. You may wish to learn more about how to attract investors to your startups.
4. Pricing / Cost issues:
While this is directly related to competition, 18 percent of companies failed because they had no competitive pricing strategies in place, such that they got snuffed out of life in their first few years in existence. Good and constantly reviewed pricing strategies would ensure that the company remains in business in the face of stiff competition. Some common pricing mistakes companies make include Basing Prices on Costs, Rather Than Perceptions of Value, Relying on “Marketplace” Pricing, Spending Too Much Time Serving Unprofitable Customers.
5. Poor Product Presentation:
Some businesses don’t understand the traction that products bring. This is one of the major reasons why startup businesses fail to accelerate the ladder of growth because of issuing out unattractive items to the public. In estimation, 20% to 30% of startups don’t have good products, especially in Nigeria. It is pertinent that firms should package properly and give the final consumers products worthy of competition and admiration.
6. The Business May Have Failed Because It Was Out-competed:
In fact, the research stated that 19 percent of new businesses failed because they have been out-competed. In fact, competition is the natural order of every industry because, in the first place, companies exist to solve competing problems. The fact that Amazon.com acquired e-Niche, Inc, Accept.com, Alexa Internet Co. at their initial years in business shows that those companies have been out-competed. Other options would have been to continue to make losses until they liquidate.
7. Absence of Business Model Canvas:
Business Model Canvas is strategic management and lean startup template for developing new or documenting existing business models. It is a visual chart with elements describing a firm’s or product’s value proposition, infrastructure, customers, and finances – Wikipedia.org. This definition from Wikipedia explains it all. It’s just like saying a business plan and as such, businesses that lack or don’t have this will definitely crash because there is nothing to guide them in pivoting the business to the next level.
8. Poor Marketing Scheme/Skills:
Businesses that thrive to relevance and success ride predominantly, apart from good products and packaging, on marketing. This is a major reason why startups fail to get the eye of the public. The products may be great but without a proper and strategic marketing scheme, such business will fail.
9. Ignoring Customers’ Need:
This is another major reason why businesses fail to progress. There is a saying that states, “customers are always right,” this may not be accepted by every startup firms/businesses. But this is important because customers go for their thirst, and if a business firm fails to quench that thirst, it will definitely run out of customer preferences, and in turn, run out of business which will ultimately lead to its crashing. In a nutshell, customers need should be the top priority of any business by providing the products they desire, respond effectively to customer complaints, build trust and inform them on recent developments.
10. Lost of Focus:
Most businesses fail because they lose focus on the reasons why the firm existed in the first place. Failure to adhere to the principle of focus can dilute the originality of the business that was first proposed. The focus should entail concentrating on the brand, style, customer service, products, etc by making sure they all synchronize with the original laid down business model.
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