5 Reasons Why Your Business Will Fail
“It’s fine to celebrate success but it is more important to heed the lessons of failure.” – Bill Gates
We all know that making mistakes can be a hugely positive learning experience, so what about business failures? Blogs, books, and podcasts are full recipes on how to succeed but largely silent about how to cope with failure. Why is it taboo to talk about failures in the context of business and leadership? Understanding and learning why business fail can give us greater insight into how to successfully manage and grow our business.
So why do business fail?
Is it a lack of leadership or bad management? Shrinking or declining industry? Cash flow problems? Lack of business acumen or financial skills? Lack of planning? Over the past 15 years I had the opportunity to lead FCP from inception to over $20 Million in annual sales. We’ve teetered on the brink of insolvency more than a handful of times and I’ve learned a lot along the way. In my real world experience businesses fail for 5 primary reasons:
1. Bad Numbers
“If you don’t know your numbers, you don’t know you’re business” – Marcus Lemonis
Arguably the most important part of any business is the money that comes in and the money that goes out. With bad numbers, or no numbers at all, you’re flying blind – and you’re not in control. Without good numbers you won’t be able to track the performance of the business which will always lead to bad decisions. If you’ve got good numbers and you watch them closely, they’ll tell a story. Understanding that story can be one of the most important factors that determine your long term success. We’re not talking about the kind of understanding of numbers that an outside hired accounting firm that files your taxes has, but someone inside the business in a financial leadership role that tracks and reports on critical numbers monthly, quarterly, and annually.
2. Bad People (Culture)
“Culture eats strategy for breakfast” – Peter Drucker
The people of your business, their habits, and values collectively make up the culture, good or bad. Without a strong culture your change initiatives will fail, there will be limited interaction and collaboration between employees and departments, and no progress will be made on critical business initiatives. There will be high levels of inconsistency and ambiguity, and there will be a sharp decline in levels of service resulting in a loss of customers, ultimately reducing the value of your brand. If you don’t have the right people or culture in place, your business (and brand) will not succeed.
3. Lack of Focus
“Here is the prime condition of success: Concentrate your energy, thought and capital exclusively upon the business in which you are engaged. Having begun on one line, resolve to fight it out on that line, to lead in it, adopt every improvement, and know the most about it.”— Andrew Carnegie
As businesses grow and become more successful they often tend to diversify away from their core business. Businesses decide to focus growth on the weaker areas of the business, mistaking them for areas of opportunity, and the core business suffers as a result. This results in lack of clarity, over-commitment, and improper allocation of business resources. You need more infrastructures (and costs) to support more product and revenue generating opportunities and you become increasingly complex, making it difficult to adapt to change when you’re less agile. With so many priorities, you and your team’s bandwidth quickly diminishes and you’ll end up doing nothing well. If you’ve got more than one or two core businesses, your business is likely to fail.
4. No Change Agents at the Top
“It didn’t matter how bleak the situation or how stultifying their mediocrity, they all maintained unwavering faith that they would not just survive, but prevail as a great company. And yet, at the same time, they became relentlessly disciplined at confronting the most brutal facts of their current reality.” – Jim Collins
Every business must have a change agent at the top to endure over the long run. It’s the type of head-on management style that feels comfortable facing harsh reality of the situation, can evaluate a business without bias, have tough conversations, and can deliver those brutal facts that influence and impact the businesses decisions and strategy. Often small and medium size business owners are conflict adverse, feeling the need to be liked by everyone, or just stubborn to change. Even when the business owners are confronted by employees with the problems I the business and they recognize they employees are right, they refuse to change and continue to make the same mistakes over and over. If you don’t have change agents exposing problems and creating solutions, your business is likely to fail.
5. No Purple Cow (No Clear Differentiators)
“In a crowded marketplace, fitting in is a failure. In a busy marketplace, not standing out is the same as being invisible.” – Seth Godin
Finding and creating your market differentiators is crucial for business success. A “purple cow” is a marketing concept developed by Seth Godin that states that companies must build things worth noticing in their products, and if their product that isn’t in itself unique and somehow remarkable, like a purple cow, is unlikely to sell, no matter how well it’s advertised. With the internet, consumers now have global access and chances are your products and services are offered by someone else somewhere in the world. If you have no differentiator and you can’t answer “Why would a customer choose my business over a competitors”, your business is likely to fail.
In your opinion why do businesses fail?
Rigid expectations and false assumptions seem to plague leaders. We have to let ourselves fail, but do it effectively!
I think you got one-half right. If you’re getting at the root cause, I think all failure falls in either people or process. The things you highlight under “focus” are really process problems. Resource allocation problems for opportunities typically flow from failures in management’s decision-making process. Have they considered ROI and NPV in relation to new opportunities? Did they engage in break even analysis? If they did, then their risk tolerance may be out of balance relative to the nature and number of opportunities they pursue outside of core business at any one time. It might make sense to look at asset turnover rate to identify inefficiencies in how assets are used to generate sales or poor pricing strategies in the diversifies areas. Again, this all seems like process to me.