The Three Most Important Factors Why Businesses FailPublished by Dennis Duitch, CPA, MBA, Advisor, Mediator

Statistics compiled by government agencies, researchers, consultants, politicians, reporters and others vary broadly but all support the fact that a huge percentage of new businesses fail in the early years, and that by year ten – for varying reasons – up to 80% are history. One university study puts the math at one-in-four gone within their first twelve months, half gone within four years, and two-thirds by year eight.  The U.S. Small Business Administration count is that around half make it through year five and a third to year ten.  Regardless of the arithmetic, most new businesses and a substantial percentage of even third-generation businesses fail to continue as profit-generating organizations.

The major causes are usually cited as incompetence, naiveté or lack of managerial experience.  And these are undoubtedly valid, however the fundamental problem is more simply a lack of appropriate and consistent ‘planning.’ A generally accepted business adage is that “failing to plan is planning to fail.”  In my experience, failure stems from a few critical elements which are common and predominant in businesses which ‘go under’:

  • Failure to continuously think through the business concept and purpose thoroughly enough to confirm that the marketplace wants, needs, and is willing to pay for the goods or services offered;
  • Failure to develop and remain committed to a strategic vision of clear Goals and core structural steps required to achieve them;
  • Failure to ensure that all principals and key players are in synch with the strategic vision;
  • Failure to base financial expectations on reality-based assumptions, with cushions for the inevitable effects of Murphy’s laws, resulting in cash flow which is insufficient to sustain the organization.

Critical Factor #1:  SETTING GOALS & OBJECTIVES

In business there are seldom any “right” or “wrong” answers, secret or otherwise.  But, there are always “better than worse” directions and choices, provided that options are developed within a framework of reference based on clear and compatible Goals & Objectives.  The capacity to achieve Goals and Objectives is perhaps 10% attributable to timing and luck, but 90% dependant on their level of clarity, reasonableness, and the implementation team(s) being ‘on the same page.’  In the great majority of start-up and early-stage businesses, this is seldom the case.

Most people overestimate what can be accomplished short-term while greatly underestimating what they are capable of accomplishing over a longer-term – Goals envisioned as a picture of what Success would “look like” at a point in the future, then believing strongly enough in their potential to commit and pursue on a consistent basis.

While achieving any Goal is obviously dependant on the outcome of decisions and actions which are taken, success is as much dependant on the paths not followed and contrary behaviors avoided.  What needs to happen for Goals to be achieved is sticking to a path focused on specified direction known as ‘Objectives.’  Whereas Goals are about envisioning where to end up, and what it could/would look like if/when you get there, Objectives are about how to get there: by what means? In what time frame? By what measurement process?  With a start-point of clear Goals – what you want to achieve and what it should look or feel like when reached – a “better than worse” series of actual steps which need to occur in order to head that direction can be formulated.

Goals and Objectives, collectively clarified, are known as Strategic Vision.  After such Vision is in place and deemed  realistically achievable (given imagination and resources), by those with creative or implementation responsibility, focus can then turn to operational considerations like who, when and where – the tactical action plans.  In business, as with life in general, among the biggest challenges to getting stuff done are just understanding the true objectives, communicating effectively with those responsible to ensure that direction is focused and in sync.  In my experience, the greatest flaws in goal-setting for a business stem from failure to (a) set a clear timetable for achievement, and (b) develop and communicate clarity as to what reaching the Goal means in measurable, quantifiable and specific outcome.

Goal Setting is the art of predicting the future, and the best way to create the future is to predict it,” in the words of management guru Peter Drucker. The ability to create our own destiny starts in three distinct and core phases:  Developing the Goals – a vision of what the time-targeted future looks like; Clarifying the Objectives – what needs to happen, what puzzle pieces need to be in place to achieve these goals with moderate risk; then, Defining the Tactics and Action Steps – targeting the right paths, people & places to facilitate achievement, with strategy for course-correction along the way. TACTICS is knowing what to do when there’s something to do;  STRATEGY is knowing what to do when there’s nothing to do.” 

Critical factor #2:  DEVELOPING A BUSINESS PLAN AND CULTURE

A formal business plan deals with those tactical & operational issues, and is typically developed as a  written document presenting analytical description with financial projections to clarify assumptions, expectations,  and map the business or project’s direction ‑‑ in other words, the people and procedures and timeline to make the Plan happen.  The time frame for a business Plan may be as short as several months, but at least one to two years is the norm.  The formality of a Business Plan is too often by-passed in the Strategic planning process except when required in connection with obtaining financing, which leaves a gaping hole in the potential for short term profitability and risk avoidance, as well as in providing a management tool for better steering the business long‑term.

Also, as important as strategic direction and tactics are to optimizing potential for productivity and effectiveness, the impacts of ‘organizational culture’ – the company’s reason for being in the first place, and the ‘values’ that principals aspire to – should be a core factor in clarifying strategic vision and its manifestation within a Business Plan.  Unless correlated fully, values  get hidden and often lost in the details, until a point when they surface to create conflict that can seriously jeopardize achievement of Objectives, and often threaten the continuity (even survival) of the business.

Critical factor #3:  REALITY-CHECKING THE OBSTACLES

A next critical step is to consistently and realistically define the short & long-term hurdles that need to be overcome.  These include issues ranging from labor supply, product mix & procurement, getting & retaining clients/customers, pricing and market competition, to management & systems capacity, monitoring activity & measurement assumptions upon which projections, forecasts and expectations are based. It also means having concrete understanding for the challenge of implementing tactical changes when required.

One of the biggest obstacles to success for a new and early stage business is changing direction when experience does fail to meet the Plan.  Reality is that once policies, procedures and people are in play, a level of inertia takes hold and most people, by nature, are resistant to ‘Change’ since, having bought-in to the procedural aspects of conducting the business, they generally become wary of even the concept of change much less its implementation. Far too often, in personal as well as business relationships, we dismiss the warning signs which evolve from ‘smell test common sense’ with rationale that X or Y or Z is a temporary aberration which will improve on its own over time. (This is simply a trait of human nature because we are primarily emotional beings who look for evidence supporting what we want to be ‘true,’ and opt to dismiss data or instinct that is inconsistent with those wishes).

Moreover, if the owner(s) or managers(s) lack capacity to rethink Strategic Vision and execute Change in actions and tactics, misaligned strategies can literally destroy the resources, processes, culture and flow that sustain a company. Effectuating Change in a manner which minimizes distractions and missteps of transformation can only happen through re-setting clear enough vision that key players understand and accept the necessity for Change, the importance of acting immediately in concert, and are genuinely motivated to participate. Key steps here involve communicating the vision, eliminating potentially undermining obstacles, and incorporating changes into the Business Plan which recognize and reward those who facilitate effective transition, all within the framework of existing culture.

THE PUNCHLINES

The most important factors in new business success encompass implementation of Goals and Objectives with clear vision, communication, and coordinated strategy for utilizing resources in a manner where the team is working on the same pages in a common culture.  Any significant change in underlying assumptions should always trigger assessment of the strategic direction, since well-executed evolving strategy is almost always safer of disruptive change than sticking with non-adaptable (even if more sophisticated) strategy that fails to address the realities.

When employees are frustrated, demotivated or demoralized, it’s almost always due to absence of clarity in Vision & Strategy, Execution and/or specific outcome criteria by which they’ll be judged and rewarded; what follows then is culture modification that can evolve to include paranoia, absence of teamwork, and a very high probability of failure.