Why Do Businesses Fail? – Part 2

When businesses fail, most of the time you are better off looking inside the business for reasons or excuses. There’s a core group of internal and external factors that time and time again trip up businesses. (You might like to read Why do businesses fail? – part 1)

External factors contribute to around 10-35% of business failures (as discussed in my previous blog Why do Businesses Fail? – Part 1).

The vast majority of business failures (around 65-100%, according to Corporate Turnaround – How Managers Turn Losers Into Winners! by Donald B Bibeault) are due to internal issues. In other words, problems that are within management’s control (often referred to as “bad management”).

So what is bad management? It can include any one or a combination of the following:

  • Autocratic Rule – Many businesses begin as one- or two-man bands and this structure is generally successful during the early stages of a business’ life cycle.  However, as the business develops, its operating and financial systems and processes become more complex and may be more effectively managed through delegation to a management team. I’ve seen businesses fail on the back of one ill-informed decision which could have been avoided, had the autocratic business owner consulted his management team.
  • Inbred Management Team – This occurs when the management team remains unchanged (and therefore unchallenged) for a prolonged period.  The team essentially becomes stale, choosing the security and stability of what they know over the risk and uncertainty of new ideas.  I’ve worked in a number of global organizations which effectively mitigate the risk of inbred management by regularly shifting their employees into new positions.  Under this structure employees are continually developing themselves and their roles as they are encouraged to make their mark on each position through the introduction of new ideas.
  • Unbalanced Management Team – I’ve worked with a distribution company whose management team consisted primarily of sales-people. The absence of a broad skill set across the management team significantly increased the risk of threats and/or opportunities remaining unidentified until they become a significant issue to the business (through non-compliance with a new regulation, for example, or increased threat by a competitor who took advantage of an opportunity before the unbalanced management team even knew it existed).  The key to an effective management team is to gather a group of experienced and knowledgeable employees across all divisions, and then encouraging those individuals to contribute to overall business success.
  • Inadequate Finance Team – This can spell disaster for any organization, regardless of size or specialty.  The finance function is often perceived as a ‘black hole’ – adding little value to business activities but incurring significant cost to ensure compliance with relevant laws and regulations. This lack of respect for the finance function often starts at the top (maybe as a result of autocratic rule or an unbalanced management team) and can result in (i) reduced funding to hire experienced finance staff; and (ii) the finance function being the last to know about significant decisions. These two factors result in a weak finance function, which produces weak financial information, which is considered unimportant by the management team, which considers the finance function to be a black hole – let the vicious cycle begin…

Bad management is a real risk to the success of any business, regardless of its size, specialty or stage in its life cycle.  Business owners and managers need to be able to identify bad management to hopefully avoid it in the first place – or at the very least nip it in the bud when it appears – and implement appropriate strategies to ensure their business is supported by a team of appropriately experienced, qualified and empowered employees.

There’s so much to say on this topic, so in my next blog I’ll be turning the magnifying glass on the common errors of “bad management”.

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