7 Reasons Why Businesses Fail

Business

In the next five years 70% of the businesses currently operating will have folded up. They would be replaced by a fresh crop of businesses. The same thing would happen again in the next five years. It is like an endless circle. Businesses do not just fail; there are certain factors that bring about their failures. The business world is like a huge jungle; the businesses that have managed to survive for decades have obeyed certain rules and avoided many of the factors that bring about failure in business.

There are quite a lot of factors that could wreck a business, but we have listed 5 that we think is responsible for most businesses’ failure.

Embezzlement by company CEO:

This is one of the most popular reasons why businesses fail, both startups and well established businesses. The CEO spends the company’s money living an extravagant lifestyle. On the outside the company is raking in huge profits, but in reality the money is tunneled away and spent on luxurious cars and holidays.

The Medici Bank was a financial institution created by the Medici family in Italy during the 15th century (1397–1494). It was the largest and most respected bank in Europe during its prime.

 The bank ran up large debts due to the family’s profligate spending, extravagant lifestyle, and failure to control the managers, their bank went insolvent. (Wikipedia)

Mismanagement/managerial blunder:

Another very popular reason is mismanagement or a series of managerial blunders. Many people do not know this, but not all entrepreneurs are good managers and not all inventors are good business administrators. In a situation whereby an entrepreneur or inventor decides to be in-charge of the administration of his business then disaster is just lurking by the corner.

The advice is this; stick to your strengths, don’t go poking your nose where you know you don’t have an expertise, just because you don’t want to lose some extra bucks. Delegate wisely.

In the 1990s Larry Ellison managed Oracle Inc. Due to his carefree attitude and managerial incapacity, his sales team was posting profits figures that didn’t really exist; they were booking future license sales in the present quarter so as to increase their bonuses. So on paper, the company was making huge profits but in reality the money was not there. When the truth finally came out the company’s stock price fell and Oracle’s board threatened to replace Ellison, but he somehow managed to remain. He however relinquished the managerial aspect of the business to more experienced hands and focused on product development.

Inability to adapt to changing tides:

The world is dynamic; it is ever changing. The technologies that are state-of-the-art five years ago are old fashion and obsolete today. Many businesses have failed due to their inability to change or their reluctance to follow current societal trends. Some CEO and business administrators are adamant, stubborn and proud, they know things are changing, their young subordinate are telling them, but for sentimental reasons they prefer to do things the old way. And in the end, the rushing tides of modernity beats them to oblivion.

A tragic example of this can be seen in photography heavyweight Kodak. Kodak basically invented digital photography in 1975, much earlier than any company knew what it meant. But rather than capitalize on this they took their invention and put it in the cupboard, and instead focused on their film business. To their understanding, promoting the digital photography will mean cannibalizing their film business, and they didn’t want that. In business it is not about what you want, it is about what the consumers want!

Even when Kodak decided to start producing digital cameras their products weren’t classy at all; they were bulky and heavy. Meanwhile, competitors like Nikon, Sony, Canon kept innovating with cutting edge features like face and smile detection.

Kodak may have invented digital photography, but their lack of willingness to pursue and promote their invention; to adapt to changing tides, caused them to go bankrupt.

Government policies:

It is basic economics that investors do not like to invest in any country with unstable government policies. In fact, this is the major problem developing countries face in their bid to woo foreign investors. Most African countries’ policies change with changing government.

A government will lift ban on one product, another government will come and place a ban on it. Businesses suffer in such conditions. There are also cases where government supports one business at the expense of another or others. So while one business flourishes, the other or others suffer; a case of governmental-influenced monopoly.

Inability to innovate:

Businesses are living entities; they live, they breathe and respond to stimuli. Businesses, just like humans, need to remain fresh. Doing things the same way the same time for many years creates boredom and kills positive energy. Therefore, there is always a need to be innovate; to try out new things, to create occasions that would bring adrenaline rush.

Blockbuster was a globally recognized movie rental which dominated high streets and was a regular part of millions of peoples’ Saturday night entertainment. Little more than ten years ago, Blockbuster boasted over 8,000 stores and $3 billion in annual revenue, yet today it stands bankrupted and idle with only 500 stores remaining open.

Blockbuster failed due to its ability to adapt to changing tides as well as to innovate. Technology is changing rapidly and is changing the way people view movies, but Blockbuster refused to change. The internet is stupidly exciting, companies like Netflix, Redbox, Lovefilm stream videos online to millions of customers. And to imagine that Blockbuster had the chance to buy Netflix in 2000 for $50 million but refused is downright unbelievable.

There are more reasons why businesses fail, the above is just a few of them. If any other comes to your mind be kind enough to share.

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