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Running a business isn’t an easy path. It requires dedication and plenty of hard work. And while there has been a rise in new venture applications, the rate of businesses that fail is surprisingly high. According to the U.S. Small Business Administration, roughly 20 percent of small businesses end up failing in their first year.Â
To achieve your goals in business, it’s beneficial to know the causes of business failure to avoid them. Successful business owners need to have the ability to understand and mitigate risks to the company. This allows the organization to find a better and more secure position in the market by efficiently providing the right products and services that meet consumer demand.Â
To secure your business, it’s vital to understand business failure reasons and the early signs that lead to more significant concerns. Leadership should expect obstacles to come and must be able to manage or foresee them to avoid them altogether.Â
To avoid the most common pitfalls, here are twelve causes of business failure you ought to know:
1. Financial Hurdles
From inadequate financing to poor cash flow management, a business with a dry bank account is one of the prominent causes of business failure. Organizations require cash flow to function through sales cycles and to operate in business.Â
Plus, business owners need to be on top of the working capital required to keep operations running from day to day, including payroll, fixed and varied overhead expenses, and payment of outside vendors. Business owners must also determine the right mark on pricing products and services to balance costs with generated revenue.Â
Moreover, it’s also vital for business owners to determine a near-accurate forecast of income and costs to avoid encountering sudden surprises that could derail your cash flow. Business leaders disconnected from this awareness of their fiscal responsibility will result in shortfalls that can rapidly lead a business out of operation.
2. Lack of understanding of your market and customers
To get your business off from the ground and keep it afloat, it’s essential to understand your competitive market space and what buying habits your customers have. Organizations must be able to test the viability of their business concept to gain a better chance of success.Â
Conducting market research and creating a customer journey is vital to selling more effectively, staying competitive, targeting new customers, and identifying new opportunities. Without prior research and information, you risk selling to the wrong people in a marketplace that won’t effectively lead to success.
To determine the best path for your product or service, prepare yourself with adequate research: use free open-sourced data or your network of contacts to gain insightful information such as developing customers’ profiles and discovering new trends.
3. Bad planning
Effective long-term planning is the key to success for any business. Bad planning and lack of strategy only ensure setbacks that are among the common causes of business failure. Business owners must be able to map out the growth of their business by conducting market research, recognizing competitors, and being proactive on trends to remain relevant.
Having an effective business plan must be set in place to meet the needs of the business even before operations begin to set the company up for the challenges to come. To avoid pitfalls, establish your business model and infrastructure well in hand and identify potential revenue streams in advance to keep your business running and achieve success in the long term.
4. Weak leadership
Having dedicated and proper management is vital to the success of any business. Leaders of a business must recognize their team’s capabilities, from skills they excel or lack in, to take action and fill those gaps. Effective leaders communicate, direct, offer opportunities, and provide rewards to achieve business goals.
Furthermore, good management allows a business to function efficiently, without taking on counterproductive jobs, by constantly being aware of where the business stands. Having strong business leadership is crucial to motivation, effectivity, and productivity for employees, which creates a happy and healthy working environment.
5. Setting up a business in an industry that isn't profitable for you
Many people get carried away from having initially exciting business concepts to setting them up without prior background preparations. It’s vital to make sure that the business you intend to put up is in an industry that can sustain growth through the years.
In addition, some industries are no longer viable choices because their potential markets are incredibly saturated. When a market is saturated, you’ll need to determine your niche to stand out. So if you intend on achieving high profit for your business, make sure your idea, product, or service, is adequately equipped to face the challenges of the market to secure your position and attain long-term success.
6. Failure to communicate your product or service
Value proposition is vital to drive sales and build a more substantial customer base. Having the proper understanding of what you’re selling is crucial to securing better sales and customer engagement. One of the biggest causes of business failure is the lack of sales due to the connection gap between your market and your communication points.Â
When your team is engaged and can relate the value of the product or service well, it can compel customers to see the benefit of adherence. Developing strong value propositions ensures your team’s effectiveness while connecting with your target audiences much better to acquire a more loyal customer foundation.
7. Not communicating your business ideas
A business cannot achieve success entirely due to one individual. This is why having a reliable team that can support your ideas and endeavors is crucial to achieving success. In many cases, business leaders need to be able to share new business ideas with others to receive objective feedback.Â
When you are able to share your concepts and vision, you can brainstorm effective means of achieving your idea while developing your business. You can even approach potential customers who can provide opinions on a possible product to find out if your product can become a solution to customers’ problems.
8. Overdependence on a few main customers
Developing an overdependence on a few big-spending customers is one of the causes of business failure, especially when they suddenly disappear. When you’re over-reliant on a few main customers, and even just one of them simply doesn’t return, your cash flow and profit are immediately hit. You may try to entice them back through discounts and special offers, but these can only lead to poor margins in the long term.Â
Consider diversifying your customer base by including this as a strategic objective in your business plan. To further minimize your risk due to a diminishing customer base, you can diversify your product portfolio or encourage customers to a reasonable period contract for unique niche products or services.
9. Stagnant attitudes
Organizations need to stay on their toes to remain relevant and attain success in today’s business landscape. Negatively reactive behavior and stagnant attitudes keep business leaders complacent, ultimately leading to business failure.
Also, business owners, leaders, and management need to anticipate and react to competition and stay up to date on technology and market changes that can keep a business from failure. Stay innovative and always be aware of trends that may not seem directly relevant at first but can affect your industry to remain competitive in the long run.
10. Lack of customer strategy
No matter what industry you’re in or the kinds of products and services you peddle, your customer should always be considered the most critical aspect of your business. Having a disconnect by not understanding how your customers influence your business is one of the biggest causes of business failure.Â
Understanding your customers significantly can play a better role in developing your strategy. Also, businesses with customer-driven strategies build better long-term relationships by being aware of and providing solutions to their customers’ problems. When you align your strategy and goals with what your customers aim for, you create a stronger brand and better customer acquisition, raising recognition and sales.
11. Not knowing when to say "No"
One of the unexpected causes of business failure is when an organization can’t seem to stop saying yes all the time. To achieve sustainable success in business, you’ll need to determine and deliver the proper manner of saying no. Not every avenue is an opportunity worth pursuing, but continually saying no might seem like it could harm future possibilities.Â
To remain relevant, you need to provide quality, proper delivery, follow-through, and follow-up on your customers, but going after more business than you can produce can reduce your overall profitability and stack up more stress.Â
There are means of saying no that won’t make you seem inflexible or rude, as long as it’s done politely and in the proper context. Instead of adding pressure to acquire it all, consider saying no to projects or business opportunities so you can focus on maintaining quality instead of risking it all for quantity.
12. Marketing mishaps
Businesses that fail to plot out their marketing plans correctly often end up underestimating the total cost of a campaign, leading to overspending and eventual failure. Marketing mishaps such as proper preparations of capital required, prospect reach, and accurate projections need troubleshooting, and it can be challenging to secure financing immediately or redirect capital from other departments.Â
Businesses need to ensure that they’ve set realistic budgets for pending and potential marketing requirements. Having realistic projections that set possible target audience reach and sales conversion ratios can lead to more cost-effective and successful marketing campaigns.
6 Examples of Big businesses that Failed
Even the biggest companies in the world can encounter setbacks that can deviate from the path of success to one of business failure. Eighty-eight percent of Fortune 500 firms that made it big since 1955 are now gone. Whether these companies went bankrupt, got merged, or failed to adapt and innovate, they were unable to future-proof their businesses out of existence.Â
Here are six examples of big business that failed:
1. Pan American World Airways
Founded in 1927, Pan American World Airways pioneered commercial aviation and became a pillar of international air travel. Unfortunately, due to corporate mismanagement, flawed regulatory policies, and damaging shortness of cash, Pan Am ceased operations in 1991 after flying the skies for sixty-four years. Its abrupt shutdown left a gap in the airline industry, resulting in billions in losses and thousands of workers getting laid off.Â
During the 1930s, Pan Am was the first airline to offer regularly scheduled flights across the Pacific and Atlantic. It also set industry standards such as providing first-class sections and in-flight movies. And while the airline did emerge as the dominant international carrier after World War II, it failed to anticipate competition in the decades to come. Pan Am could not adapt to the intense competition after the airline industry was deregularized in the late 1970s. This led to ill-fated attempts to develop domestic route networks through mergers that didn’t exactly boost customer preference.Â
The largest air carrier in the US, Pan Am, had over-invested in its existing business model without investing in its future. By the 1980s, Pan Am management began selling off its assets to keep the airline afloat. When the Gulf crisis and the recession hit, it decimated air travel, leading the company to file for bankruptcy in 1991.
2. Kodak
The Eastman Kodak Company was founded in 1888 and dominated the photographic film industry in the 20th Century. Kodak was famous for revolutionizing the industry by making photography more accessible through the distribution of affordable camera equipment. As a result, they were unmatched, with a market share of over eighty percent in the US and more than fifty percent internationally. However, despite its market dominance, it was still unable to recognize growth opportunities.Â
For more than one hundred years, Kodak had a simple business model: to sell cameras at cheaper rates while offering the much-needed films, printing sheets, and others at higher profit margins. This led to huge revenues and popularity that cemented the “Kodak moment.” But while the company was focused on its photographic film cash cow, the invention of the digital camera in 1975 would prove to be the start of Kodak’s downfall.Â
The man who invented digital cameras, Steve Sasson, actually worked as an electrical engineer at Kodak who tried to pitch his invention but wasn’t taken seriously. Kodak’s management saw digital cameras simply as an innovation that disrupted the company’s core business. They were confident, thinking that the standard printed photos would be timeless and that no one wanted to see pictures on a small TV screen. This missed opportunity would be Kodak’s bane, as printed photos would eventually be a thing of the far post.Â
While more new inventions would usher in the age of digital imaging, Kodak remained focused on photographic film, despite film’s growing irrelevance in the market. And although Kodak would try to shift the momentum by engaging in digital camera options in the 2000s, the move would prove far too late.
3. Blockbuster
Another story about failing to foresee overwhelming innovation is about the home movie and video game rental giant Blockbuster Video. Blockbuster was founded in 1985 and became an iconic brand that practically owned the video rental space. By 2004, it had almost eighty-five thousand employees with more than nine thousand stores worldwide. However, the advent of the internet and digital streaming became an innovation that turned the video rental industry upside-down.Â
Most know of the instance where a budding company named Netflix approached Blockbuster with an offer to sell itself to the video rental giant for $50 Million. Unfortunately, Blockbuster’s CEO thought that Netflix and video streaming on the internet was a tiny niche business and wasn’t interested in the offer. However, Netflix would later become the leading media company engaged in paid streaming which now has 222 million subscribers and a value of over $90 Billion.Â
Blockbuster failed to see the value of internet streaming and could not transition towards a more digital model. It even was unable to see the opportunity to acquire a budding startup that would become a revolutionary entertainment behemoth. By 2010, almost all Blockbuster branches would be closed due to the absence of customers renting videos and would eventually file for bankruptcy.
4. Nokia
A testament to how limitations to innovation can be among the biggest causes of business failure was Nokia’s demise in the early 2010s. Nokia was the most considerable cell phone maker at the peak of its popularity in the late 90s and early 2000s. It rode the mobile phone revolution by turning the chunky mobile phones of its time into an in-demand fashion accessory aligned with its utility. For many years, the Finnish company was a global giant and enjoyed unrivaled dominance in the mobile phone segment.Â
Nokia was known for its hardware and efficient battery life, with the company relying on these things that made the brand successful. They had tremendous belief in their successful product and thought optimized hardware was the customer’s preference. However, Nokia was left in the dust when the smartphone revolution began. They overlooked the value of the phone’s software which became essential to the customer experience.Â
Despite being the one to develop the first smartphone in 1996, Nokia failed to see the domination that touchscreen phones would claim. They also failed to adopt an operating system despite competition like Apple and Samsung already cementing their positions in the industry. This would eventually lead to Nokia’s depleting market share and its downfall.
5. Yahoo!
Founded in 1994 as a directory of other websites, Yahoo grew rapidly and eventually became a web portal that surged in the dot-com bubble. By 2005, it owned twenty-one percent of the online advertising market. In 2011, its email service had close to three hundred million users. Its primary domain, Yahoo.com, was the highest read news and media website in 2016, amassing over seven billion monthly views. However, by the late 2010s, Yahoo would find itself a simple shell of its former self.Â
Yahoo’s demise was mainly caused by a mismanagement of its growth. Instead of maintaining the number one position, they outsourced their search engine to Microsoft Bing. Instead of pushing through with a deal meant to buy Google for $5 Billion in 2005, Yahoo chose not to foot the bill. When Facebook offered to sell itself to Yahoo for $1 Billion in 2006, Yahoo lowered its initial offer, leading Mark Zuckerberg to bow out from the proposition. Google and Facebook would eventually become two of the most enormous tech titans in the industry, with a market value larger than many countries.
6. Xerox
In the 1960s, the Xerox Corporation had cornered the copy machine industry and would remain on top for the next few decades. The company dominated the market with its series of patents and relied on its factories churning out copy machines for offices worldwide. However, their reliance on their product base restricted them from focusing on new product development.Â
This led to a stagnancy at Xerox, with their management shunning their employees’ inventions. For example, when Xerox engineers developed personal computing elements, they were instructed to share them with Apple technicians instead. Apple and Microsoft would eventually use these concepts to build on their technological dominance. Xerox should have been more open to innovation and missed out on reaping the benefits of its emergence.Â
When its market share started to diminish in the 1970s, Xerox tried to restructure but could not match the competitive benchmark in the market. As a result, by the 2010s, Xerox would sell many of its assets and now remains relevant in its research and development operations.
Conclusion
Understanding the causes of business failure will allow you to avoid the pitfalls that many companies experience and secure your own endeavor to achieve long-term success. Running a company is no easy task, and by facing the constant challenge with knowledge and confidence, you can gain the experience to keep your business running.Â
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