28 Main Causes of Business Failure and their Solutions
28 Main Causes of Business Failure and Their Solutions
The success of the company depends on 3 elements; (1) The Entrepreneur, (2) The Enterprise, and (3) The Environment.
Everything rests on the entrepreneur, for it is his responsibility to apprehend and manage the other 2 elements. He is the one who engages in the process and mobilizes the necessary means to succeed. Failure at his level results in failure.
To better understand the various causes of businesses failure, we would classify these 28 causes of businesses failure into 5 main categories:
- Strategic causes
- Marketing causes
- Technical causes
- Organizational causes
- Financial causes
If you are running a business or about to start one, it’s very important for you to take into consideration all these 35 main causes of business failure and for you to begin looking for mitigation strategies on how to avoid or overcome them.
28 Main Causes of Business Failure and Their Solutions
STRATEGIC CAUSES OF BUSINESS FAILURE
1). Absence / Poor sector analysis
One of the main causes of business failure is the absence or poor sector analysis of the business. Many businesses failed because the owner did not do a proper sectorial analysis of the business, or the owners did not take their time to understand the business they are operating.
The absence or poor sectorial analysis of business might cause the owners not to properly understand the needs of the business, its target customers, its competitors’ strengths and weaknesses and how to adapt to changes that occur within this particular sector of business.
Solution: To overcome the risks or issues that are associated with the absence or poor sector analysis as the main causes of business, you must identify the target market in your sector of business, understand your competitors, understand the recent trend or changes that are affecting the business and develop plans or strategies on how the business will stand out from the rest of the existing businesses in your sector.
2). Absence / Poor Competition Analysis
The absence or poor competition analysis is another main cause of business failure. Most businesses fail because the owners did not take the time to understand the main competitors or competition they will face in the marketplace.
Absence or poor competition analysis may result in the business owner not being able to identify the competitive advantages of the business and understand the strength and weaknesses associated with their competitors.
Solution: The key solution here is for you to identify your direct and indirect competitors to your businesses, analyze your competitors’ strengths and weaknesses, and develop a competitive strategy on how you will make your business different from that of your competitors.
3). Wrong strategic choices
Another strategic cause of business failure is the wrong strategic choices of the business owners. When you do not make decisions on choices that aligned with the business goals, it would likely fail in the business.
Wrong strategic choices can cause the business not to be able to achieve its goals, not to be able to compete effectively in the market places, and may fail to adapt to changes associated with the business.
Solution: To avoid this sort of business failure, business owners must make strategic choices that are in line with the goals of their businesses.
They can do so by setting clear and flexible goals, doing proper research before taking any decision, and most importantly getting feedback from their customers and team members within the business.
By following these tips, you can make sound strategic choices that will increase your chances of business success.
4). Absence of management documents
The absence of management documents is another major strategic cause of business failure.
When a business lacks the necessary management documents it needs, it finds it hard to make good decisions, track records or be in a good position to identify its problems and evaluate performance.
Solution: To overcome this issue, every business owner should ensure they have a good management document in place.
This involves having a proper business plan, a marketing plan, an operational plan, and a handbook providing guidelines on how to manage employees within the organisation.
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5). High taxes
High taxes have been one of the strategic causes of business failure all over the world. This has been so true, especially for new businesses. A high tax reduces profit, brings about employee turnover, discourages investment among investors, and contributes to the issues of cash flow within the business.
Solution: The issue of high taxes as a cause of business failure can be overcome by seeking help from professionals who are knowledgeable in the concepts of tax.
You can also, overcome these issues by trying to pay your taxes on time, also try negotiating your tax with the government, and also take advantage of tax breaks and deductions.
MARKETING CAUSES OF BUSINESS FAILURE
6). Market poorly analyzed
Poor market analysis is also a main cause of business failure. When business owners failed to analyse the market correctly, it wills results in a big failure in the business.
Poor market analysis can cause a business to lunch a product or service that is not needed in the marketplace, it can also cause a business to either overprice or underprice its products and services in the marketplace or may result in poor target marketing.
Solution: By conducting a thorough market analysis, business owners can increase their chances of success.
This can be done by having a marketing plan in place, identifying current and future market trends, targeting the right customer segment, and understanding your target market.
7). Poorly targeted market
Most businesses failed as a result of poorly targeted markets by their owner. When a business owner does not take their time to understand their target market it will increase their chances of business failure.
Many businesses failed because they do not understand who their target market is, or they failed because their products or services are targeting the wrong set of customers.
Solution: To solve the issues of poor target market analysis, business owners need to identify the right business target, price their goods and services according to the income category of their customers and target customers based on market trends.
8). Overvalued Clients
Overvalued Clients are another major cause of business failure. This is a situation where a firm or business decides to put so much emphasis is a particular set of key clients that end up making the entire business revenue to be dependent on this set of key clients.
This is bad because; emphasis on a set of key clients will results in the business on unable to diversify its products and services to other sets of clients.
Solution: To solution is to learn to diversify your client bases, and monitor your financial performance. By doing the above, business owners can avoid overvaluing clients and reduce the risk of business failure.
9). Bad Marketing Plan
A bad marketing plan is also a main cause of business failure. A marketing plan is like a road map of how the business intends to market itself in the marketplace.
If the marketing plan is not good, then it would affect the marketing of that business.
A bad marketing plan may result in the business not targeting the right customer base, it may results in the business being unable to differentiate itself from its competitors in the market place and lastly might cause the business not to be able to adapt to changing business environments and trends.
Solutions: Bad marketing plans can be averted by doing proper market research, targeting the right customer base, have a unique selling proposition and a strong brand identity.
Business owners may design a marketing strategy that will help them succeed by using the advice in this article.
10). Poor Product Launch
Another main cause of business failure is poor product launch. Product launch is the process of releasing a new product or service to the marketplace. If a product or service is poorly launched into the marketplace, it might result in a big business failure.
Poor product launches can be a result of products or services targeting the wrong customers or users, the product or services may not be well-received by the public, or the product or services may not be priced competitively and as a result of a weak marketing campaign.
Solutions: To avoid business failure caused by poor product launch, its vital business owners often set clear and realistic goals, develop a marketing plan, create a launch event, get feedback from the public, and most importantly monitor results.
TECHNICAL CAUSES OF BUSINESS FAILURE
11). Poor quality product
Most businesses failed as a result of poor product quality released into the market. No customers want to spend their income on a product or service that does not give them the value they desire.
Poor product quality or services would result to customers low retention, customer dissatisfaction, decline in sales, and increased operational costs and will greatly affect the brand reputation.
Solutions: To avoid these risks, businesses need to produce high-quality products.
This can be done by producing or offering products or services of high value, following strict quality control standards, and also by testing products to a smaller target market before releasing them on the launch date.
12). No Product Adaptation
No product adaptation is a major technical cause of business failure. Product adaption is the ability to design your products or services in such a way it meets the changing needs of the users.
For example, Apple Company has been very successful in iPhone adaption over the past decades, changing it according to the needs of its users or market trend.
Failure to design your products or services to adapt to changing market or consumer needs will results in a loss of market share, loss of revenue, a decline in sales and bring about competition from other vendors.
Solutions: To overcome this obstacle, it’s advisable that your conduct a proper market survey on the products you want to launch or are already in production, be innovative in your design and packaging, and be a customer focus than a producer focus.
13). No Mastery of Technology
Many small and medium-sized businesses have failed as a result of no mastery of technology. In today’s digital age, businesses that are not technologically aligned have a high chance of failure.
You need technology in almost all aspects of a business, from production to designing, packaging, marketing, transportation, and delivery.
Most businesses especially in the less developed nations, lack basic websites or social media presence. The majority do not engage in promoting their products using online channels and social media available at their disposal.
Lack of mastery of technology can results to slow operations, poor customer service, poor compliance, and results to security issues.
Solutions: All businesses both small and medium sizes need to embrace technology in running their day-to-day activities. Embrace new technology at all levels, including at the payment level, marketing level and transportation and delivery.
14). Difficulties of Supply
Another technical cause of business failure is the difficulties of supply. Every business depends on a third party for the supply of its raw materials in one way or the other.
When businesses faced difficulties in the supply chain, it wills results in failure in the business. This might result in product outages, product quality, and increased operational costs.
Solutions: To overcome supply difficulties, every business owner should learn to have more than one supplier.
Also, trust building is one of the key factors in doing business with a partner who supplies your raw materials. Lastly, developing good communication channels between the business and its suppliers.
15). Absence of sources / Insufficient quantities
The absence of sources or insufficient quantities is another technical cause of business failure. When businesses do not have access to their raw materials on time and in the right quantity can result in the collapse of the business.
This is perfectly true when the business demands for its products become high while supply is very low. This can result in increased operational costs, decreased quality and brings about reputation damage to the business brand.
Solutions: To avoid the risks associated with insufficient quantities, business owners should develop a plan for their resource generation, have more than one supplier, and mostly importantly, learn to stay up to date with market conditions.
16). Price increase
The price increase has been proven over the years to be the major technical cause of business failure. One mistake often carried out by most established businesses with little or no competitors in the market places is to increase the prices of their products and services.
An increase in the price of a good or service often results in a decrease in its demand… This also results in reputational damage and increased operational costs.
Solutions: Before you increase the prices of your products or services, do detailed market research on their effects.
A business can increase its revenue by building good relationships with its customers and improving its service delivery and innovations. Also, provides great discounts on your products once in a while to encourage customers to buy or use your services.
ORGANISATIONAL CAUSES OF BUSINESS FAILURE
17). Bad Organisation
A bad organisation is one of the main causes of business failure. A bad organisation is one with no well-defined structure, rules, and regulations and one with a bad or poor working environment.
A bad organisation does not satisfy its employees and also often failed to solve any issues from customer complaints.
Solutions: To overcome issues of bad organisation, first work on the leadership structure of the organisation, build a well-defined culture for your organisation, develop standard procedures that need to be followed by everyone, sets clear goals and expectations, create a positive working environment and most importantly get feedback regularly from both employees and customers.
18). Lack of Confidence
Many businesses have failed because of a lack of confidence in the owners of the product or services they want to deliver into the marketplace.
Some business owners who lack confidence in their work end up being discouraged and this negatively affects all those directly and indirectly involves in the production process.
Lack of confidence often results due to some setbacks they encountered.
Solutions: Every business is a risk, so you should take risks if you want to build a successful business. Identify your strength and weaknesses and focus more time on what you know best.
Also, surround yourself with positively-minded people and go the extra mile by seeking professional help when you get stuck at a particular stage in business development.
19). Poor / no job profile definition
Another Organisational cause of business failure is poor or no job profile definition.
This is common when those who have been hired do not have a full understanding of what they are supposed to do or in cases when both the employer and employees have different expectations of the work outcome.
It can also result from the hiring of the wrong or unqualified employees to perform a particular task.
Solutions: Make sure you employ or only hire those that are qualified for a particular task. Make sure everyone involves know what task they are to do and have the same expectation of the work output.
Clearly define the responsibilities, duties, and expectations for each job role in your organization.
20). Plethoric staff
Some businesses have been known to fail as a result of too many staffs trying to do the same thing. Too many staffs can result in to increase in operational costs, as the business owner would be forced to pay salaries to so many workers.
Solutions: Only hire those that qualify to do a certain task.
21). Staff not motivated
When workers are not well motivated or suffer from low wages, they are likely going to be less productive in their day-to-day activities. Poorly motivated staff can affect the performance and customer services rendered by those staff.
Poorly motivated staff can results in a high employee turnover rate, which would in turn affect the productivity and performance level of the employees.
Solutions: Learn to pay staff well, and also practice paying workers on time. Provide incentives and celebrate the successes of every employee and most importantly, encourage teamwork among all employees.
22). Incompetent manager
A high number of businesses have failed in life as a result of owners hiring incompetent managers.
When businesses begin to increase in size, most business owners or CEOs often hand over the business to a running manager who oversees all the activities of the business.
However, when you have an incompetent manager, running your business, it’s highly that they have poor leadership, poor communication strategy, and an inability to correctly delegate tasks to staff under their control.
Solutions: Learn to hire the right and experienced manager to run your business for you. You can further provide training and development to all managers you have hired across the various departments in your business.
23). Disagreement between partners
Disagreement between partners (founders and co-founders) on how to run a business can often result in business failure.
When partners disagreed on how to run a business, it can result in a loss of focus, poor decision-making, increased stress, and damaged relationship between co-workers.
Solutions: It’s crucial to have clear expectations with your partners before you launch your firm. Roles and duties, decision-making procedures, and dispute resolution techniques are some examples.
Also, effective communication is key to building effective and successful partnerships with others.
24). Dishonesty of partners
A business can also fail when you are working with dishonest partners. When business partners are dishonest, it can result in a lack of trust, loss of clients, breakdown of the business, and brings about damaged reputation.
Solutions: To overcome issues of dishonest partners, learn to work with people you gain their trust. Also, have regular audits of the business to help check lapses within the business.
25). Family problems
No business can stand successful, especially at its early stage when the founder or owner has family issues at hand.
Family issues have been the leading main cause of business failure. When family members disagree on a particular matter or area, it can affect the business as they would find it very hard to work together or solve conflicts.
Family issues can also result in to lack of accountability and poor decision-making in the business.
Solutions: if you find it hard to run due to family issues, it is suggested that you hire a professional manager with years of experience in the type of business you are running.
FINANCIAL CAUSES OF BUSINESS FAILURE
26). Poor Project Cost Assessment
Most businesses failed at the start-up level because of poor project cost assessment. When the cost of a project is underestimated, it cans results in the failure of the business.
Likewise, when a project cost goes over its budget, it can result in project delays and poor project quality.
The delayed project and poor quality resulting from the over-budgeted cost can result in loss of customers which alternately can fail the entire project and business.
Solutions: To overcome business failure as a result of poor project cost assessment, it’s important to create a detailed project plan that includes all the details of every cost.
Also, track down costs and expenses during the project execution stage, and most importantly, communicate with all partners and stakeholders involved about the project cost.
27). Unnecessary expenditure
Another financial cause of business failure is unnecessary expenditure. 1 in 5 businesses in the United States of America failed as a result of unnecessary expenditure on the part of the business owners while about 82% of businesses failed in the USA as a result of poor expenditure.
Unnecessary expenditures such as overspending habits on advertisement and marketing campaigns, wasteful spending on equipment and tools, travel and entertainment expenses, and excess payment or overpayments of employees can result in business failure.
Solutions: If you’re experiencing issues with excessive spending, there are a few things you can do to get your firm back on track. First, thoroughly evaluate your spending plan to identify areas where you may save money.
You should also consider engaging with a business expert to help you identify and reduce excessive expenditure.
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28). Weak Security: Misappropriation of Funds
Last but not least the financial cause of business failure is weak security. Lack of security measures put businesses at greater risk of theft, fraud, and other crimes. This might lead to money being misused, which would be a financial breakdown for many sorts of businesses.
Theft between employees, and theft between managers all cans fail in the business.
Businesses that have physical facilities and require protection can also be a target if no good security measures are put in place.
Cyber-attacks are also common or pose a threat to company data, confidential information etc.
Solutions: Educates all employees on the danger of cyber security and theft, and regularly carries out an audit to monitor all financial expenses.
Proper inventory should be carry-out to make sure that nothing has been stolen. Alarms systems could be put in place to help prevent theft.
Final Conclusion
The above are some of the main reasons why most businesses failed and how you can overcome this failure. Both internal and external factors are responsible for business failure.
The major causes of business failures be it Strategic causes, Marketing causes, Technical causes, Organizational causes, and financial causes can all hurt a business and bring it to its downfall if not properly resolved.
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