Why do businesses fail?

[canzior]

What are some of the reasons that you think most businesses fail? Specifically, not anything general like poor planning, but what exactly causes them to go under? I am curious cause my website Jobs4Trade.com is up and coming(service trading and bartering) and One of our approaches is planning not to fail as well as planning to succeed. So what is a businees killer?

[.amaZe]

Because the expenses over burden the owner, or the owner loses interest in the business.

[rpermana]

Poor customer service.

I hate those company website that use auto-respond (such as"We have received your message and we will get back shortly") when I really & urgently need help.

And I got to wait like more than a day to get a reply. At least update the status to us everyday.

[akula]

What are some of the reasons that you think most businesses fail? Specifically, not anything general like poor planning, but what exactly causes them to go under? I am curious cause my website Jobs4Trade.com is up and coming(service trading and bartering) and One of our approaches is planning not to fail as well as planning to succeed. So what is a businees killer?

Interesting question. Fortunately, there's a scientifically verified, correct answer. Changes in enterprise values are mostly determined by random variables. In other words, scientifically speaking the majority cause (i.e. the only statistically significant cause) of both business failures as well as business success is the same; it's luck, either the good or the bad variety. Understanding this fact of life is fundamental to understanding mathematically efficient strategies for startup success.

More specifically, because any business is a complex system operating in complex environment, it is impossible for entrepreneurs to influence the survivability of this system in any statistically significant way...factors such as the decisions of your competitors, the weather, the government, personal health, family circumstances, the global economy, your supplier situation or the preferences of your customers have a much bigger impact on whether your business will fail, as compared to anything within your control, such as the size of your marketing budget, your super excellent customer service, ip portfolio or the resumes of your management team.

To that end, from a startup perspective, the secret to entrepreneurship success lies not in the quality of your business, but in the number of businesses the founder invests her self in. Diversification always trumps incremental improvements as the more risk efficient strategy for entrepreneurial success, and there are no other important differentiators between successful and failed ventures other than luck.

[Nigami Enterprise]

factors such as the decisions of your competitors, the weather, the government, personal health, family circumstances, the global economy, your supplier situation or the preferences of your customers have a much bigger impact on whether your business will fail.

I disagree a little bit Akula

In business there is never a scientific formula. Otherwise every business would copy each other!

A lot of it is luck, but then you make your own luck. Luck is defnatly not the biggest differentiator between successful and failed ventures.

SWOT analysis springs to mind right now. All that you have named above are threats to a business. With threats provides opportunities. It’s the business that can adapt best to the threats that will end up being successful.


Lets look at the global economy. Lots of business are closing down there doors which is creating greater opportunity for those that can keep their doors open. Dealing with lots of business’s in Sydney there actually very busy for this time of the year.



I don’t believe that having more businesses will increase your chance of success. It’s like playing roulette and putting your money on every number bar a few. Sure you have a greater chance of walking away with something but at the end of the day it’s not going to be much.


I believe that a lot of businesses fail because the owners don’t know how to manage a business. They might be great at the particular trade that they do but don’t know how to capitalise on their talent.

[ACMAir]

Businesses NEVER fail, management fails.

[akula]

I believe that a lot of businesses fail because the owners don’t know how to manage a business. They might be great at the particular trade that they do but don’t know how to capitalise on their talent.

Sure I agree. Venture failure is an interesting topic. I don't really have any opinion on it one way or the other. The fact of the matter is entrepreneurship is mostly about luck, and as much as we all would like to believe that our own fantastical skills as business owners contribute to our success, in the large scheme of things, these beliefs are the symptoms of an illusion of control as well as hindsight bias.

Obviously, it's difficult for founders to try identify the determinants of venture outcomes. The average founder has a career spanning 3-5 ventures. This data set is way too small for analysis on why ventures succeed or fail. If I'm a founder, and I beleive that I'm a good manager and my business suceeds, then I'm gonna extrapolate this result and conclude that all businesses succeed because of good management and, conversely, all businesses fail because of bad management. On a macro scale, of course, this is not the case. There's plenty of examples of ventures with stellar management going under, in as much as there are examples newbies, drop outs and alcoholics putting together some very successful companies.

That's the magic of startups. It puts everybody on par for the chance to make it big. And the role of luck is undeniable. Ask any venture capitalist what they think about luck. Faced with investing in thousands of alternative business plans it pays to try and figure out which opportunities are likely to work out over those that won't. Alas, as any investor will tell you, such forecasting is mostly folly, because luck intervenes and makes it impossible to identify which bunch of guys in a garage are gonna end up building a google.com and which are gonna do a pets.com. To that end, the venture guys diversify and back both of the teams knowing perfectly well that one of them is gonna fail.

Unfortunately, entrepreneurs rarely achieve equivalent levels of diversification..which is very sad for a lot of reasons.

[Shadesz]

While I agree that luck does play a role in business I cannot agree with the argument that it is mostly luck. Nor can I agree about there not being a scientific formula for the success of a business.

IMO there is a formula and luck is a minimal factor in business.

The whole franchising industry is built around a repeatable "scientific formula" that minimizes the "luck" variable.

Innovation leads to quantification which is a scientific practice. Businesses that use this process CAN figure out the extremely complex formula for success and they do it often. That is all a franchise is.

Now some people do it better than others. Some franchises have seen more success than others... but it IS doable and minimizes the margin for error (which some would call bad luck)

Being an entrepreneur means figuring out your specific scientific formula for success, for your specific industry, for your specific customer base, for your specific commodity, for your specific workforce, and so on, and so on... the discovery of that perfect formula is never ending.

Some entrepreneurs figure that formula out better than others (even if it is subconsciously). The ones that do figure it out are the ones that are more successful.

With that I would say the main reason that businesses fail is the inability of the entrepreneur to figure out the success formula for their business. The reasons for that are variable - lack of quantification, inability to comprehend, pride, humility, distraction, ignorance, working in not on the business, and on, and on.

My .02

[Brainy]

Well, I guess I'll mention several things:

1) There are many different types of "businesses", you simply cannot say that the general term "business" relates to "every type of business"...so as there are different types of music (let's say) there are various degrees of businesses - whether they are micro, small, medium, large, huge....whether they are simple, intermediate, complex...there is no "general-ality" (norm) in using the simple "word" business...

2) As for the term "failure"; it can be final, or it can be a part of the process of what many entrepreneurs term a "learning environment" - many successful entrepreneurs have "failed" many, many, times...and those that have done the necessary "learning" and "have gathered the errors of their ways and learned from then" - many people think that failure is a part of the overall equation that "may" eventually lead to success...

And "success" for some people is $8 per hour, and success for some people is $100,000 per month...

I guess defining terminology can make things a bit useless, if you take it to the extremes that I see or mention.

"Most businesses fail"; I guess that is a very true statement. But that is not the entire full context of an entrepreneurs journey - I believe that failure is definitely a "positive experience" for those people that understand the dynamics of "striving" for "what works" and "pushing forward to their dreams and desired lifestyles".

And I would also say that if a "business" is the entrepreneur's 1st attempt; that failure ratio in most cases is nearer to 100% than it is to anything else.

Good luck.

[Brainy]

Most of the millionaires that I have known in my life seemed to become successful inherently; they did not "know" or "ultimately plan from the start" to become a millionaire or multi-millionaire.

So there, another ambiguous variable into the so called "science" of being able to be "successful" in a "business".

Cheers...

[mthomas]

I believe it was Malcolm Gladwell that said that the "outliers"--those that are extremely successful without contributing a lot of work, did so due to luck. All other successes, he argued came from hard work and persistence.

I certainly think luck does play a factor, but any business worth its salt has to have facilities built into place that can weather random environmental variables such as the economy and weather. Resigning your business' fate to luck and chance is just negligence and poor management.

Luck certainly helps and has most definitely determined the success of a lot of businesses, but hard work and persistence is what determines most. We wouldn't be doing our jobs as entrepreneurs and leaders if we just wait for a lucky day.

Akula, I see your point with the Venture Capitalists point of view and your argument about diversifying. From a macro perspective, you are right. In broad terms, business' success or failures appear to occur randomly, with the unpredictable release of information. In fact, in finance, it is said that stock prices often appear to follow "random walks".

However, from the micro perspective, from the point of view from the individual running their business, they must hone their abilities to adjust to these variables and random environmental stimuli and react. And they must do so over and over again (thus, persist).

[canzior]

Great responses...I think you can compare it to playing a game of football. You can prepare all you want to for an opponent, but there will certainly be surprises once the game gets going. The teams that can make a half time adjustment win, the teams that cont lose. Realistic planning is extremely important from the gate as well. Confirmation biases can kill your idea quicker than anything else. You need to believe in your idea and then I would recommend figuring out as many reason as you can think of why it will fail.
I must say, I agree in the luck factor, but not that it is 100% luck. But can't proper planning reduce the number or degree of failure? If you started a business to take advantage of the housing boom, shouldn't you realistically have thought that it would end? There are things that are out of the owners control, but that's not always a good enough excuse. If inclement weather effects your business, shouldn't you realize this when you start operating? If you sell same sex marriage paraphernalia, you might want to hold off before you start stocking your shelves.

[akula]

I must say, I agree in the luck factor, but not that it is 100% luck. But can't proper planning reduce the number or degree of failure? If you started a business to take advantage of the housing boom, shouldn't you realistically have thought that it would end?

Again, great question...what can an entrepreneur do to improve their chances of success? The answer to this question is as simple as it is deceptively difficult. Essentially the dynamics of startup success work accordingly: if you're a founder sitting in your kitchen staring at the back of a napkin with your idea scribbled on it, the fact of the matter is that it is impossible for anyone to accurately forecast the probability of that venture's possible future success. Is it 10%, is it 20%, is it 90%? No one can tell. The only thing we know is that at the beggining, the probability of any startup's success is between 0 and 1, but as observations prove, it is impossible to narrow the forecast down any further. The same principle applies irrespective of whether the venture is a one man band started in a garage, or an institutionally funded, government sponsored, university spin off. No matter what the starting point is for any business, it is impossible to accurately forecast the probability of the whole thing ending up where you want it to end up.

However, all this uncertainty is tempered by most universal and immutable of all certainties. It's an inescapable fact of life that as the number of ventures founded by the entrepreneur increases, the probability of the entrepreneur achieving career success approaches 1 (i.e. 100%). As sure as the sun's gonna come up tomorrow, entrepreneurs can enjoy the certainty that the more they try to succeed, the more likely they're gonna succeed.

And that's the most important thing any entrepreneur can do to increase their chances of success. Things like planning, adequate finance, sensible recruitment, structured opportunity selection etc. are some of the things which can help an entrepreneur achieve success, but they're extremely limited in their function because they do not help to create certainty in being able to accurately forecast the probabilities of venture outcomes. No matter how careful you are, the probability of your venture suceeding is not going to become any more certain than a number somewhere between 0 and 100 percent.

The only thing that is guaranteed to improve the odds and increase the entrepreneur's chances of success is the act of starting a new venture...it's a fact that you can bet your bottom dollar on and it's a fact of life that makes or breaks every entrepreneurial career.

[andrewlm]

What are some of the reasons that you think most businesses fail? Specifically, not anything general like poor planning, but what exactly causes them to go under? I am curious cause my website Jobs4Trade.com is up and coming(service trading and bartering) and One of our approaches is planning not to fail as well as planning to succeed. So what is a businees killer?

I think there are many reason for fail of business like ineffective marketing and self-promotion and poor customer support and Underestimating the competition. Business location, poor management etc.

[ladyflguru]

I agree somewhat with what ACMair said, management is something that tends to fail before a business. I also think business tend to fail without the right practices and ethics. Such as selling something for twice the price you can get it elsewhere. Screaming ad's on tv, infomercials that say something is great when its really not then the customer service is horrible to boot. Something that could help businesses is having people behind you working with the same passion as you have. Ad's that speak to the customer not at them and a customer service center that helps you whenever you need it 24/7, because not all of us are morning people