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Starting a business is a challenging task, and not everyone succeeds. In fact, business failure rates are quite high. According to the Small Business Administration (SBA), 20% of small businesses fail in their first year, 30% in their second year, and 50% within five years. However, the rate of business failure is not the same across all industries, with some industries having a higher failure rate than others.
“The only real mistake is the one from which we learn nothing.” – Henry Ford
In this blog, we shall discuss about business failure, including its causes, examples from India and around the world, and the valuable lessons that entrepreneurs can learn from it.
What is Business Failure?
Business failure is when a company ceases operations due to financial or operational difficulties. It can result from various factors such as poor management, lack of market demand, insufficient capital, or intense competition. Business failure can take different forms, such as bankruptcy, closure, or liquidation.
Causes of Business Failure
Several factors can lead to business failure. The following are some of the most common causes:
Poor Management: Poor management is one of the leading causes of business failure. Many entrepreneurs lack the necessary skills, knowledge, or experience to manage a business effectively. Poor management can lead to ineffective decision-making, lack of planning, inadequate financial management, or failure to adapt to changing market conditions.
Lack of Capital: Capital is the lifeblood of any business. Lack of sufficient capital can hinder the growth and expansion of a business. Many entrepreneurs underestimate the amount of capital required to start and sustain a business, leading to cash flow problems, insufficient resources, or inability to repay loans.
Market Demand: The success of any business depends on the demand for its products or services. Lack of market demand can result from several factors, such as changing consumer preferences, intense competition, or technological advancements.
Economic Conditions: The state of the economy can have a significant impact on the success or failure of a business. Economic downturns, inflation, or recession can result in decreased consumer spending, increased operational costs, or difficulty in accessing capital.
Legal and Regulatory Compliance: Failure to comply with legal and regulatory requirements can lead to severe consequences such as fines, lawsuits, or loss of license. Many businesses fail due to non-compliance with tax laws, labour laws, or environmental regulations.
Examples of Business Failure in India
Kingfisher Airlines – Kingfisher Airlines was once India’s second-largest airline. It was founded by businessman Vijay Mallya in 2005. The airline quickly became popular for its luxurious services and low prices. However, the company soon began to face financial problems due to high debt and a lack of profits. In 2012, the airline was forced to ground its entire fleet due to unpaid bills and employee strikes. The airline eventually shut down in 2013, leaving thousands of employees without jobs and customers without flights.
Reva Electric Car Company – The Reva Electric Car Company was founded in 1994 with the goal of producing electric cars for the Indian market. The company received support from the Indian government and was able to secure investments from several international companies. However, despite the initial success, the company faced several challenges. The cars were expensive, and the Indian market was not yet ready for electric cars. In 2010, the company was sold to Mahindra & Mahindra, and the brand was eventually discontinued.
Satyam Computer Services – Satyam Computer Services was one of India’s largest IT companies. However, in 2009, the company’s founder, Ramalinga Raju, admitted to falsifying the company’s accounts and inflating its profits. This led to a massive scandal that shook the Indian corporate world. The company’s stock price plummeted, and several of its clients pulled out of their contracts. The company eventually merged with Tech Mahindra in 2013.
Examples of Business Failure Around the World
Blockbuster – Blockbuster was once one of the largest video rental chains in the world. The company had thousands of stores in several countries and dominated the home video rental market. However, the company failed to keep up with the changing times. With the rise of online streaming services like Netflix, Blockbuster’s traditional rental model became outdated. The company eventually filed for bankruptcy in 2010 and closed all its stores in 2013.
Kodak – Kodak was once a giant in the photography industry. The company was known for its film cameras and was a household name for decades. However, Kodak failed to adapt to the digital age. The company was slow to transition to digital photography, and it missed out on the opportunity to dominate the digital camera market. In 2012, the company filed for bankruptcy and sold its patent portfolio.
Nokia – Nokia was once the world’s largest mobile phone manufacturer. The company was known for its durable and reliable phones, and it dominated the mobile phone market for years. However, the company failed to keep up with the rise of smartphones. It was slow to adopt the new technology, and it failed to create a competitive operating system. As a result, Nokia lost market share to Apple and Samsung, and it eventually sold its mobile phone business to Microsoft.
What Entrepreneurs Can Learn from Business Failures
Business failure is a harsh reality that many entrepreneurs face. However, failure can also provide valuable lessons for entrepreneurs. Here are some of the things that entrepreneurs can learn from business failures:
Do Your Market Research: One of the biggest reasons for business failure is a lack of market need. Before starting a business, entrepreneurs should conduct market research to determine whether there is a demand for their product or service. They need to assess their target market, identify their customers’ needs, and understand their competitors. By doing so, entrepreneurs can determine whether there is a market need for their product or service and adjust their business plan accordingly.
For example, in India, the e-grocery delivery platform, PepperTap, failed because of a lack of market demand. The company entered the market without conducting proper market research and failed to attract enough customers. Eventually, the company had to shut down its operations.
Manage Your Finances: Poor financial management can lead to business failure. Entrepreneurs should have a solid financial plan in place and should monitor their finances closely. They should keep track of their expenses, revenues, cash flow, and profit margins. Entrepreneurs should also avoid overspending and taking on too much debt.
For example, in the US, the retail giant Toys “R” Us filed for bankruptcy in 2017 due to poor financial management. The company had taken on too much debt and was unable to keep up with the competition from online retailers like Amazon. As a result, the company had to close down all its stores.
Be Agile: In today’s fast-paced business world, it is important to be agile and adaptable. Entrepreneurs should be willing to pivot their business model or change their strategy if it is not working. They should also be open to feedback from customers, employees, and stakeholders.
For example, in India, the online fashion retailer Myntra pivoted its business model after facing a decline in sales. The company switched from a website-based platform to a mobile app-based platform, which resulted in a significant increase in sales.
Learn from Failure: Failure can be a valuable learning experience. Entrepreneurs should take the time to reflect on their failures and identify what went wrong. This can help them avoid making the same mistakes in the future. Entrepreneurs should also be willing to seek feedback from customers, employees, and stakeholders.
For example, in the US, the social media app Vine failed because of a lack of innovation. The app did not introduce new features or make significant changes to its platform, which led to a decline in user engagement. The company could have learned from its failure and made changes to its platform to stay relevant.
Stay Up-to-Date: Technology and consumer trends are constantly changing. Entrepreneurs should stay up-to-date on the latest developments in their industry and be willing to adopt new technologies and strategies. They should also be aware of their customers’ changing preferences and adapt their business accordingly.
For example, in India, the ride-hailing platform Ola adopted electric vehicles as part of its business strategy. The company recognized the growing concern for the environment and adopted a sustainable business model. This move helped the company to differentiate itself from its competitors and attract environmentally-conscious customers.
Build a Strong Team: A successful business requires a strong team. Entrepreneurs should focus on building a team that shares their vision, values, and work ethic. They should also hire employees with diverse skill sets and experiences to complement their own. Entrepreneurs should invest time and effort in training their employees and creating a positive work culture.
For example, in the US, the music streaming service Rdio failed because of poor leadership and a lack of teamwork. The company’s founders were unable to work together effectively, which resulted in poor decision-making and a decline in user engagement. By contrast, companies like Google and Apple are known for their strong corporate culture and effective teamwork.
Focus on Customer Experience: The success of a business ultimately depends on its ability to meet the needs and expectations of its customers. Entrepreneurs should focus on providing a positive customer experience and building strong relationships with their customers. They should listen to their customers’ feedback, respond to their concerns, and strive to exceed their expectations.
For example, in India, the budget airline SpiceJet faced financial difficulties in 2014 but was able to turn things around by focusing on customer experience. The company invested in new planes, improved its on-time performance, and provided better customer service. As a result, the company was able to attract more customers and increase its revenue.
Have a Clear Vision and Purpose: Entrepreneurs should have a clear vision and purpose for their business. They should be passionate about their product or service and have a long-term vision for the future. Entrepreneurs should also communicate their vision and purpose effectively to their employees, customers, and stakeholders.
For example, in the US, the luxury retailer Barneys New York failed because of a lack of clear vision and purpose. The company struggled to define its brand identity and failed to differentiate itself from its competitors. By contrast, companies like Tesla and Amazon are known for their clear vision and purpose, which has helped them to attract loyal customers and investors.
Way Ahead
Business failure is a reality that many entrepreneurs have to face. However, failure can also provide valuable lessons for entrepreneurs. By learning from the failures of others, entrepreneurs can avoid making the same mistakes and increase their chances of success. Whether you are starting a new business or trying to grow an existing one, it is important to stay agile, manage your finances, and stay up-to-date on the latest industry trends. With hard work, dedication, and a willingness to continue to learn from failure, entrepreneurs can overcome the challenges of starting and running a successful business.
It is important to note that failure is not the end of the road. Many successful entrepreneurs have experienced failure in their careers but have bounced back stronger. The key is to learn from your mistakes and use that knowledge to make better decisions in the future. Across the world, there are several examples of entrepreneurs who have experienced failure but have gone on to achieve success.
For instance, Steve Jobs, the co-founder of Apple Inc., was famously fired from his own company in 1985 after a power struggle with the board of directors. However, Jobs used this experience to start another company, NeXT, which was eventually acquired by Apple and paved the way for his return to the company in 1997. Jobs’ innovative vision and leadership style helped turn Apple into one of the most valuable companies in the world, with a market capitalization of over $2 trillion as of 2021.
Another example is Mark Cuban, the billionaire entrepreneur and owner of the Dallas Mavericks basketball team, who experienced several business failures before achieving success. He started his career by founding a computer software company, which ultimately failed. He then moved on to start a chain of bars and restaurants, which also failed. However, Cuban persevered and eventually founded Broadcast.com, an internet radio company that he later sold to Yahoo for $5.7 billion. Cuban went on to become a successful investor and television personality, with a net worth of over $4 billion as of 2021. Next can be you!
