Causes of Companies’ Failure

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Table of Contents

Introduction
Causes of companies’ failure
Conclusion
References

Introduction

Business growth contributes to economic development of a nation (Rob, 1998, p. 1). However, in U.S.A., the alarm bells are ringing on the failing rate of successful companies. It is estimated that, the rate is three times quicker than three decades ago. Specifically, in the last decade, over 80 percent of successful companies are either in declining or stagnating stages (Gregory and John, 2007, P. 2). The affected sectors include financial services, transport and construction companies (Dunn and Bradstreet special report, 2011; 2010). The concern is: why do successful companies fail? and thus the backbone of this analysis.

Causes of companies’ failure

The companies histories of failure are well documented in the literature. The causes can be classified into five major groups: financial, economic, marketing, external environements and managerial related factors (Patsula, 2001; Parsa, et al., 2005).First, companies fail due to external climatic variations making daily operation challenging and stopping futuristic view of companies’. In fact, no management time is allocated in forecasting looming survival difficulties even though they are long term (Gregory and John, 2007, p. 10;).

Second, failures arise due to in-bound inflexibility to risk- failure to predict market trends. As firms’ age or stiffen over time, they tend to look for status quo, and only risk aversion becomes a concern to them limiting their market operation and visioning (Gregory and John, 2007, p. 11).

Third, breeding of good supervision disease is common between failures. They are considered market place ‘myopia’ and are guided only by external customer’s burden and stock market alerts (Gregory and John, 2007, p. 11; Ram and Jerry, 2002, p. 2).

Fourth, these firms not only limit planning improvements, but also they are not ready to capture the variability of today’s business environment. They build prior plans on assumption of static future, precision budgeting is thenorm, plans are outdated and inwardly focused on past events and finally every dot is measured and reported with little focus on improvement. In fact, they have in-built owner stresses, low human capacity, and limited technological improvements (Parsa et al., 2005, p. 305; Gregory and John, 2007, p. 12; Patsula, 2001).

Fifth, most firms fail due to financial constraints following inadequate accounting records, pathetic financial conditions, and poor organizational culture. This result in limited access to loans which limits organisation expansion capacity. In fact, they take more time to act agaist slow payment from larger firms than small businesses. Lack of finance result in finacial stresses like: debt, high cost of goods sold, and small profitability (Parsa, et al., 2005). Finally, physical position and competitive environments attributes like growth speed, physical location, and product differentiation important for success are lacking within most failures (Parsa et al., 2005, p. 308). For instance restaurants located close to competition can benefit from customer traffic but should be ready to embrace competiton associated with such strategies (Parsa, et al., 2005).

Conclusion

Most successful companies are characterised as: risk lovers, multi decision makers, adaptive to changing market environements, outwardly focussed, innovative in product development and finally are market leaders. It seems no learning exist amongst failures. Therefore, there is need for risks transformation and acceptance amongst traditional managers, additional investment in early warning system and knowledge sharing between management and surbodinate staffs, and finally reinvention of speedy and adaptive decision making processes.

References

Dun and Bradstreet special report 2010, Global business failures report, New York: Dun and Bradstreet, Web.

Dun and Bradstreet special report 2011, Global business failures report, New York: Dun and Bradstreet, Web.

Gregory, PH & John, E 2007, Why Companies Fail: And the information imperatives to help ensure survivability, Web.

Parsa, HG, Self, T, David, N & King, T 2005, Why restaurants fail, Cornell hotel and restaurant administration quarterly, vol. 46, no. 3, pp. 304-322. Web.

Patsula, M 2001, The entreprenuer guidebook series, Web.

Ram, C & Jerry, U 2002, Why companies fail, Web.

Rob, H 1998, Planning against a business failure, Web.

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Causes of Companies’ Failure

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