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Why businesses fail and succeed

04/01/2019

While there’s no exact formula to business success, there are certain indicators for anyone hoping to beat the competition. We look into some of the reasons behind success and failure.

Why businesses fail and succeed

 When it comes to new businesses failing, there are a lot of demoralising statistics out there. Some analysts claim that 66% of new businesses will fail within the first ten years, with the figure rising as high as 96% for the most pessimistic commentators.

Of course, some of the reasons for success or failure are dependent on the industry within which a business sits. A common example (and well-worn joke) is the demise of Blockbuster, the video and DVD rental chain that fell victim to the rise in online streaming services.

Speaking more generally, though, there are some key reasons why businesses continue to thrive in their fateful first few years.

Why do businesses succeed?

Research

It’s unsurprising that business founders have absolute belief in their product and its ability to sell. But there’s no point in holding this viewpoint if the intended audience aren’t interested in the product, or aware of how much they need it.

With this in mind, it’s important for businesses in their early stages to look into the market in a lot of depth, and stay in touch with their intended customer base. Some younger businesses choose to do this via surveys or focus groups, depending on what they need to know.

How businesses use this research is also an important consideration. It could be that the target market responds with praise for a competitor’s product. It’s important for business owners to pay attention to the trends that affect their products. If consumers are drawn towards apps and are less keen on their web-based counterparts, this isn’t a cue to completely take down the online presence and focus funds on app development. It might be an idea, however, to dedicate some time and money to developing an app for more platforms. It’s important not to be swayed too heavily by trends and research. New business owners should build on what the research tells them rather than copying what the audience says word-for-word.

Knut Haanaes argues that good business strategy is striking the right balance between exploration and exploitation. Exploration is pioneering new ideas and venturing into new territory, while exploitation is ensuring that things work in the short-term, relying on an existing knowledge base. “Companies become less innovative as they become more competent,” he says.

Research at the early stage of a business seems like a logical step, but it’s also important to continue to stay in touch with the market and what it wants. Businesses that have stood the test of time have an acute sense of what their customers want and value. Apple has refined what it offers to customers over many years, and the widely accepted model—in which new technology is released with fanfare on a loosely annual basis—is exciting

and stimulating to its existing customer base. Its status as one of the few $1tn companies in the world shows that its understanding of the market pays off. As people grow and change, so too should the business model.

Understanding competitors

It’s very important for businesses to understand their competitors. But first, they must adequately identify them. Rather than competitors just being other businesses offering similar products, a competitor is any business in which a potential customer might decide to spend their money.

Business owners might be aware of their competitors from the offset, or they might encounter younger companies that crop up and rise to the level of competitor over time. There are a number of reasons why it’s important to know the competition. They will be a large determining factor in everything from the price of your product to the way it is marketed.

But as well as understanding the basics of the competition—what their product is, how they market it and how much it costs—a truly savvy business owner will go a layer deeper.

Understanding as much as possible about a competitor, from its staff to its values to its future aims, will in turn reveal the strengths and weaknesses of that competitor. There will likely be things that your competitor is doing better than you, just as they will have weaknesses where you have strengths. If you know these, you can look at your own business and decide what you need to consolidate, and what you need to improve on.

People

Those employed within the business are a huge part what makes it work: specifically, in the early days, when the team will be smaller and responsibilities bigger.

It’s important within a small team that the talents held by its employees are matched up with the areas of the business within which they excel. Successful business owners will have a clear vision of what they want their business to be like, and will think about this when making new hires and matching talent to roles within the organisation.

While hiring the right people is important, so too is the leadership of a business. If a business is bogged down with founders that lack dedication, or partners who don’t share the same aims of the business, its chance of success will be less than that of a business that presents an united front and has a collaborative and dynamic leadership team.

A huge part of ensuring the success of a business is creating an environment in which people want to stay. Having clear guidelines of what a company’s culture should entail may seem false, but it’s the best way to keep everyone on the same page and create a like-minded workforce. If people are respected and genuinely happy to be employed by a business, they will strive for its success with a similar dedication to that of the founders. Part of this is creating a culture that supports the employees, but another part is investing in those employees: training them, setting goals for them and ultimately challenging them to excel.

Once the core staff group is consolidated, another important consideration for businesses that want to succeed is the people who influence the business externally. Networking is a good way for business owners to make connections with professionals that could become allies at a future point. Having supporters within your own sector is invaluable.

Particularly in a business’s early life, it’s crucial to have mentors and other advisers who understand the market or the reality of running a business. As external people to the business, they have a degree of distance, but will be able to guide the new business owners through the process of consolidation and growth.

Why do businesses fail?

Money

The goal of any business is to make a profit, but a lot of businesses in their early stages are ill-equipped to manage their profits and reinvest them in the most lucrative places. It’s the type of problem that could be easily avoided by consulting an appropriate mentor or external expert.

As a new business gets used to making money, it can also be difficult to manage the flow of funds, especially in periods of growth as the business begins to bring in more funds than expected. A lack of foresight in managing the cash-flow on a month-to-month basis could be a key instigator in a business’s failure.

Another crucial financial aspect of starting a business is ensuring that the investment process is well-handled. New businesses might seek angel or venture capital in order to fund their business. Not doing so, or picking the wrong time to do so, could contribute to a business’s failure in the shaky early days.

Marketing

Marketing can at times be difficult to quantify, which can in turn lead businesses to neglect it—particularly in the early days when there may be other priorities. It might be tempting for businesses to get bogged down with the product itself, neglecting the promotion of the product. If the market doesn’t know that the product exists, it’s unlikely that the business will enjoy widespread success. Some business failures are due in part to a lack of appropriate marketing.

Lack of planning

While businesses might start quickly and sometimes spontaneously, it’s unsustainable to continue to grow without a plan in place. Directors should have clear intentions of the direction in which they want the business to move, with tangible targets shared by employees. Owning a business is not a good venture for anyone who just wants to “see what happens”.

Poor timing

It’s difficult to know the right time to implement certain business decisions. Some businesses fail because they decide to expand their output prematurely—or too late. Other businesses take on too much too soon, and are unable to scale back in order to save themselves.

This all becomes a lot more complicated when external economic conditions come into play. A business might be performing successfully, but if a recession hits and demand for their output drops, chances of survival will drop considerably. Tens of thousands of businesses went bust in the recession following the economic crisis in 2007/8—an indication that businesses must be watertight in order to survive tough times.

Becky Kells, Editor, AllAboutFinanceCareers