What Causes Business Failure?

Business failure is not an uncommon occurrence. One of the main reasons why more people do not get into business for themselves is that more businesses go under within the first three years than those that succeed. Look around any city, and you will see places where businesses used to be. There is always that one location that becomes a new restaurant every few years, only to go under just as quickly. There are entire websites dedicated to “dead malls” which were once bustling hubs for commerce, but have dwindled down to only a handful of shops. But what are the main reasons businesses fail?

 

Consumer Financing

Lack Of Adaptability Causes Business Failure

Every industry has its own environment. Businesses produce things that get sold to consumers and even other businesses. Much like how animals in nature need to adapt to survive, entrepreneurs must also keep up with industry changes, as well as consumer demands, or they will experience business failure. One only needs to look at Netflix to see how they not only adapted to industry changes, but set a model for other companies to follow. In this example, big name chains such as Blockbuster and Hollywood Video went under, because they were firmly rooted in the old “brick and mortar” model, as well as dealing with physical media. Netflix realized the industry was shifting to digital delivery and on-demand video to computers and personal devices, and led the charge, which caused the big chains, as well as the smaller independent video rental stores, to experience business failure. Similarly, Research In Motion, the creators of Blackberry personal devices, took a huge hit in the mid to late 2000s when Apple, Samsung, and Motorola came on the scene with their smartphones. While everyone wanted a Blackberry because it was much more functional than most mobile phones, the new wave of smartphones decimated RIM’s sales, causing them to downsize their operations drastically. However, technology is not the only change that causes failure due to lack of adaptability.

Other businesses that failed due to lack of adaptability:

Kodak

Sears

Pan-Am

USPS

Abercrombie & Fitch

 

Over-diversification Leads To Business Failure

If your business is good at something, it should try to be the best. While there is something to be said for diversification, sometimes businesses get in over their heads, and branching out can lead to business failure. Borders, once known as “the other big bookstore,” tried to compete with Barnes & Noble. Borders came close to going under once, and was actually subsidized by K-Mart. In the 1990s, Borders was doing well as a chain of bookstores, with flagships from Maine to Washington, and everyplace in between. Then Borders started to really diversify to make up sales, which were going to Barnes & Noble. Borders sold software, and that did not pan out. They then decided to branch out into music and movies, right on the cusp of the digital era. They even launched a “print on demand” program for a select list of books, and invested heavily in machines for stores to have, in order to quickly slap together a few pages with glue binding. After booksellers were seeing sales plummet due to digital delivery, and no one was getting books on demand printed in the stores, Borders hung on and sustained themselves with music and movie sales. However, this sis not last long, and 2011 saw Borders experience hard business failure.

To take another example of business failure, this time from the heady consumerist days of the 1980s, there is Coleco. Coleco used to make shoe leather up until the mid-1900s. In the 1970s, Coleco switched gears and got into the video game industry ahead of most companies. They rode the wave well into the 1980s, buying licenses from Nintendo to sell ports of their games on their proprietary hardware. Once the home video game industry began to implode for various reasons, Coleco pushed out another winner, Cabbage Patch Kids. The craze for the dolls was a huge success, and almost offset the loss from video games. Still determined to be a leader in the electronics market, Coleco decided to release their version of the home computer, called Adam. The Adam home computer was a massive business failure, and once the target audience was saturated with Cabbage Patch Kids, Coleco’s books went far into the red, leading the company to sell off all of its Assets, the majority going to children’s toy competitor Hasbro. While over-diversification partly led to business failure for Coleco, another reason the business failed was because of something in our next section, chasing trends.

Other businesses that failed due to over-diversification:

Circuit City

Tandy

National Semiconductor Corporation

Radio Shack

Northrop Grumman

 

Just Because Something Was Trendy Once Does Not Make It A Constant

Way back when, before Tesla, and before the advent of the Prius, there was the Hummer. Back in the 1990s, there was a trend in “tough vehicles” that could go off-roading and tackle any terrain. The Hummer was the civilian model of the military’s HUM-V transport. Anyone with the cash to spend could get one, and even Arnold Schwarzenegger boasted about owning one, around the time Terminator 2 was in theaters. Sales were less than spectacular as the years went on, even though they remained quasi-status symbols. In the mid-2000s, the Hummer took on a bit of a patriotic spin during the George W. Bush’s administration, when tax breaks were offered owners. This was to stimulate the sale of gas – which was already at all-time highs – for vehicles, and Hummers were getting a whopping eight miles to the gallon, on average. When the economy took a huge downturn in 2008, no one could afford to buy a Hummer, and existing owners could not sell them because the vehicles were too expensive to maintain. People were looking for alternative and affordable transportation. The market also shifted toward more environmentally friendly form of transportation. Electric cars and hybrid vehicles, such as the Prius mentioned above, were taking center stage, and people did not want a gas-guzzling monster that would not only decimate their wallets, but also deplete a finite resource, such as petroleum. When the Hummer line died, it caused automotive sales businesses to fail across the country. The example of Hummer is the reason why businesses fail when they try to push a trend that is well past its prime.

Trendy business failures:

Dell

Toys R Us

Yahoo

Polaroid

MySpace

 

Business Failure From Dishonesty

While it is true, to a degree, that the public does not need to see everything that goes on in a business, being dishonest with the public and your financial partners are a guaranteed recipe for failure. Theranos claimed to have developed a revolutionary blood testing technique, which only required a few drops of blood, rather than the conventional method that required whole vials. This received the interest of many investors, and by 2015, Theranos was valued in the neighborhood of $9 billion. Theranos was hailed as the next “Big Thing” by sources such as Forbes and Fortune, with its founder, Elizabeth Holmes likened to visionaries like Apple’s Steve Jobs. The problem was that the equipment and the methodology had never been peer-reviewed, and many things were kept under lock and key. Government agencies, such as the FDA, took interest in Theranos, because while having proprietary technology is one thing, it is a different story when people’s health is on the line. During an investigation, the FDA found that Theranos was using technology developed by Siemens to incorrectly process blood samples, which were yielding incorrect results when put through their own tech, called Edison. Suddenly, The Centers For Medicaid and Medicare Services became involved, because if the process was faulty, Theranos was at risk of losing their access to help Medicaid patients. Financial backers filed lawsuits, because with faulty results, there would be no return on investment. Having lost the trust of the public, backers, both the health and tech industries, and investigations from government agencies, Theranos had experienced a massive business failure within the course of a year. While litigation continues, the outlook for Theranos and its founders looks rather bleak.

Dishonest business failures:

Texaco

Enron

Adelphia Communications

Bear Stearns

 

The Very Grey Area Of Crowdfunding

Since 2010, crowdfunding sites, such as Kickstarter, have been a great source to funding business ideas and making them a reality. However, the extent of checks and balances for crowdfunding campaigns only go as far as the donations. Startups will usually lay out goals and increase their scope to get more funds from interested parties. If a crowdfunding campaign reaches its goal, then Kickstarter steps back and the business is left to fly on its own. One of the biggest successes to date has been Cloud Imperium Games, which had a goal of $500,000 for its project, and received over $2.1 million, and that amount has recently taken off to over $125 million, as of this writing. But what happens when a company cannot fulfill the goals it presented to its backers? While Cloud Imperium Games has yet to deliver on their initial dates and goals, people are still giving them money, so they have not met with business failure, yet. Another Kickstarter, Zano, promised to deliver a miniature drone to backers, which netted the developers over $3.5 million, but they quickly folded and declared bankruptcy, leaving the good-faith investors holding the bag with nothing to show for it, except a few prototypes that could barely make it off the ground. This business failure was so shocking that Kickstarter, even though they have no legal stake in projects beyond the crowdfunding stage, hired a private investigative journalist to find out what happened. There are other stories about crowdfunding that follow similar lines, which has led many to not only be wary of sites like Kickstarter and GoFundMe, but also people are calling for more reform of the crowdfunding model to prevent people from getting swindled due to malfeasance or business failure.

Crowdfunding business failures:

Skarp Laser Razor

Crystal Wash 2.0

Central Standard Timing

Triton Gills

Kobe Red

 

Business Failure Does Not Just Happen For Big Companies

Business failure is not just for multimillion-dollar ideas and large corporations. The failure rate for small businesses is much higher, and few businesses last a full year before folding. Many small business failures are due to the reasons listed above, while others go under due to much more common factors.

 

Business Failure Due To Lack Of Experience

Many people dream of taking control of their financial future by starting their own businesses, but very few have actual experience in entrepreneurship. Owning and running a business usually requires people to play many roles in the beginning. Business owners have to be managers, workers, accountants, marketers, and salespeople, until there is enough capital to hire people who specialize in those areas. Unfortunately, not everyone excels at doing all of those things, and there are only so many hours in the day. If you want to open a business, but do not have experience in business accounting, take a course at your local college, or one of the many online business courses at sites like AccountingCoach or browsing the free business classes at OpenCulture. Some people make great leaders and have a very strong vision, but meet with business failure due to logistics and not having the experience to approach their business needs in a practical and efficient manner.

 

Lack Of Market Research

At the beginning of the article, we mentioned that one place in every town that opens up as a new business, only to shut down after a short while, only to have the same thing happen over and over again. The reason for that repetitive business failure is usually due to lack of research. This type of business failure happens mostly with restaurants and bars. Entrepreneurs will raise capital and get everything in place to open their businesses without researching whether or not their dreams are viable in their locale. If you open a hamburger restaurant in an area surrounded by similar eateries, you are going to experience business failure. Fine dining in an economically depressed area? More often than not, such a place will experience business failure, even if the intent is to bring money into an area. Bars and nightclubs have similar experiences, especially when trying to get clientele in an area that is already saturated with similar establishments, or if it is located in a place that is way off the beaten path from customer traffic.

 

The Wrong Financial Backing Leads To Business Failure

Many first-time entrepreneurs are denied bank loans due to a lack of collateral, or experience with business ownership. This leads them to believe that the only way they can finance their dreams is by putting up their own money. The results are usually disastrous, because these people sacrifice their life savings, max out their credit cards, put their households in financial jeopardy, and still do not have enough capital to keep things running for more than a year. Many great ideas and potentially lucrative businesses fail due to owners using personal finances instead of exploring options, such as crowdfunding, venture capital, and even low-risk commercial financing options.

 

Avoid Business Failure

By using the above sections in this article, and learning from the past mistakes of other companies, you can easily avoid business failure. Launching a new business is exciting and fun, but it also involves a lot of work. There are pitfalls along the way, and many people fall into those traps because they do not take into account all of the variables that can lead to business failure.