Business failure: A food for taught for all entrepreneurs

What is business failure?

Some conclude that a business failure occurs only when a firm files for some form of bankruptcy protection while others contend that there are numerous forms of "organizational death," including merger or acquisition. Ironically, still others argue that failure occurs in business if the firm fails to meet its responsibilities to the stakeholders of the organization, including employees, suppliers, customers and owners.

Considering theoretical standpoint, entrepreneurial process is defined as the set of activities through which innovations change existing combinations of factors of production. The most widely recognized sources of inspiration for an entrepreneur are market efficiencies and technological process. From this viewpoint, a business failure is the termination of an entrepreneurial initiative that has fallen short of its goals.

Losses that entail one's own capital or someone else's, or any form of capital reduces the rate of business continuance. A business that is not earning an adequate return (or is not meeting owner's objectives) may discontinue existence. Personal reasons such as retirement, illness, death of the owner or selling the business to make a profit accounted for 30% of discontinuance of businesses.  Hence, business failure is broadly considered as firm’s inability to exist due to loss of capital or insufficient return on investments.

Every business has a life span that is depicted by its business life cycle. A business life cycle is normally defined by four stages; Introduction, Growth, Maturity and Decline. Most business life cycles will experience a slow introduction and growth stage, a short maturity stage and a rather quick decline stage. Some studies discuss business failures as being the last stage of an organization's life cycle

Take Note

To address the issues that lead to business success or failure a firm has to be viewed in a broad perspective. Some of the causes are directly related to the owner/manager skills while others are more related to the environmental variables such as financials, competition, customer behavior etc.

In considering the owners/managers skills it is regrettable that in some cases the very strengths that an entrepreneur possesses may be the same ones that may lead to the failure of their enterprise. It often behooves the entrepreneur to seek out and use the council of outside advisors and experts to avoid the pitfalls that appear due to the owner/managers individual areas of management inexperience.

Preventive measures are mostly limited to what can be done on a firm level. Policy makers and firms can collectively influence the environment, but have limited ability to influence it individually. Once the causes are broadly identified, the ones that require high attention are addressed at the firm level. For a small business it is healthier (i.e. has a greater potential to succeed) to adapt to the environment in which it operates than to try to make the environment adapt to the firm's needs.

In today's competitive markets, the buzz-phrase is 'customer is king'. For a business, the reason for existing is its customers. Furthermore, the customer depends on a firm because of its resources. A careful examination of the resources that a firm possesses can enable it to evaluate opportunities and threats and act accordingly. Although this resource approach is only an example of the various methodologies that can be used to minimize the risk of failure, it does demonstrate that a firm must assess itself and act on that assessment. Under this approach, the assessment focuses on resources. Resources can be anything that helps produce, either in terms of intellectual/technological capital or properties/equipment.

Some resources have long-term effect while others are useful short-term and in daily operations. Some others focus on building internal efficiencies while others strengthen a firm's relationship with its external stakeholders. All these resources, considered in a balanced approach, help reduce the risks of a firm's failure and sustain healthy growth