Why Do Businesses Fail?
Simply put, turnaround management exists because businesses fail. During my time in the insolvency profession, I was astounded by the number of owners/managers of defunct businesses who were convinced that their business failed through either someone else’s fault or just sheer bad luck. Even our highest level review would reveal a handful of underlying issues, which, had they been resolved in a timely manner would likely result in the business still operating today.
So why do businesses fail?
The vast majority of business failures (around 65%, according to Corporate Turnaround – How Managers Turn Losers Into Winners! By Donald B Bibeault) are due to internal issues – problems that are within management’s control.
Around 10% of failures are a result of external factors beyond management’s control, and 25% are due to a combination of the two – and yes, about 1% of business failures are actually due to sheer bad luck!
With the GFC still in the forefront of business owners’ and managers’ minds, I’m going to focus on the external factors of business failure.
These can be crudely summarized as “failure to deal with change”. Change comes in many forms, and owners and managers need to be attuned to the environment in which their business operates, in particular their business’ susceptibility to:
- Economic change (one very close to our hearts at present) – This can take many forms and owners and managers need to be aware of which economic factors particularly impact their business. For example, is your business particularly susceptible to currency devaluation? Interest rate changes? Credit squeezes?
- Competitive change – In many industries competition is constantly changing, and therefore there’s a lot to be said for the old adage “keep your friends close but your enemies closer”. Owners and managers need to understand the competitive nature of their business environment. For example, does your business operate in an industry with low barriers to entry? Are low-cost foreign manufacturers a significant threat? Do competitors regularly lower prices to gain market share?
- Social change – Owners and managers should ask: is my business subject to social trends? Changes in lifestyle? Increased focus on environmentally friendly products?
- Technological change – This is still a significant factor in business failure. Business owners and managers should consider whether they are offering customers the most up-to-date technology, and whether the business is using current technology to maximize operational and financial efficiency.
- Regulatory change – in a world where political decision-making is often limited to the end of the next term, legislative changes are a regular occurrence. Business owners and managers should consider whether their business is compliant with the current regulatory environment and the impact of proposed changes to that environment
Business owners and managers have a choice: to decrease the threat of external factors on their business through awareness and implementation of appropriate change management strategies, or to stick their heads in the sand and risk being one of the 10-35% whose business failure is due to “factors outside of management’s control”.
Stay tuned for my next blog where I’m going to delve into the internal factors of business decline.
Elizabeth Mawby was a former executive of Vantage Performance, one of Australia’s leading turnaround management and profit improvement firms – solving complex problems for businesses experiencing major change