why do businesses fail essay

Business Failures: Reasons and Recommendations Report

Introduction, reason for business failure, source of advice when staring a business, how such services might help me, reasons for a business’s failure.

A report released by Bloomberg revealed that 8 out of 10 businesses fail within one and half years after their creation. There are several lessons that business people and entrepreneurs can learn from the colossal amount of failure experienced in the creation of businesses. They can apply the insights they gain from the failures to improve their businesses and prevent them from crashing and failing. Studies have shown that successful companies have certain characteristics in common. These include great customer service, innovative products and services, competitive pricing, focus on customer needs, differentiation in the market, superior business models, and articulate communication of value propositions.

If I were to start a business, the main reasons why it would fail include poor planning, focus on profits rather than customers, and poor leadership. Many businesses fail because people do not create short-term and long-term plans (Finlab, 2012). It is important to plan and decide the milestones that should be achieved in the next few months and the next few years. The success of the business would depend on the complete understanding of customers about their tastes, likes, dislikes, and needs (Finlab, 2012). It would be important to provide products and services that meet the needs and demands of customers (Bovee & Thill, 2014). Otherwise, the business would fail because of providing products that customers do not need. The dreams, values, and goals of customers are critical in the creation and running of a successful business (Bovee & Thill, 2014). Effective leadership includes aspects such as employee and financial management, quality decisions, training and development, and timely problem-solving (Finlab, 2012). Business failure could be avoided by creating both short and long-term goals, creating business goals based on the needs of customers, and hiring a competent individual to run the business (Finlab, 2012).

Three sources of information when starting a business include the internet, print, and television. Technological advancement has turned the Internet into the vastest and reliable source f information. Several subscription services allow users to access databases that provide information on how to start and run a business effectively. The Internet is a great source because it contains information that includes market demographics, case studies of business success and failure, financing, tax compliance, banking, registration of companies, and government laws and regulations (Smith, 2012).

Print sources such as books, magazines, and pamphlets are also a great source of information on how to start a business. Magazines and newspapers such as Wall Street Journal , Business Week , Fortune , Forbes , and Nation’s Business provide information on a wide range of topics regarding the proper running of businesses (Smith, 2012). These sources can provide information on aspects of starting a business such as creating a good business plan, financing, laws and regulations, effective business models, and what to avoid.

Television is also a source of business information even though it is not as extensive and reliable as print media and the Internet. Several programs are devoted to businesses that could provide useful information. These programs cover stories of businesses that succeeded and those that failed. They also invite professionals to talk about how to start and run a successful business enterprise.

If I wanted to start a business, the aforementioned sources of information would help me in various ways. First, they would supply information on all the requirements of starting a business. For instance, they would provide information on how to register a company, get financing, and act within the limits of the law (Smith, 2012). Besides, they would be useful when developing a business plan. Second, they would supply information on the common mistakes that en5erpreeurs make and how to avoid them when building a business. Gaining insights from entrepreneurs who failed is would be an integral part of learning to avoid making similar mistakes in my business (Smith, 2012). Third, the services would educate me and provide insights on making effective decisions. For instance, they would teach me about choosing a business structure, choosing a business location, business financials, filing and paying taxes, and hiring and retaining employees.

I have shopped at several stores and eaten in restaurants that led me to conclude that they were not going to make it in the business world. The reasons that prompted me to make that conclusion included poor customer service, bad location, and lack of competitive advantage.

The places I visited had poor customer service. The attendants were rude, slow, and inattentive. The service was poor and the attendants were unreliable. Another reason was the bad geographical location. I once shopped at a store whose demographics caused me to conclude that it would fail. It had low foot traffic, was inaccessible, and had inadequate parking, and there were few businesses and services in the vicinity. A larger competitor that offered cheaper products and was accessible was a few just blocks away. The store lacked a competitive advantage. It was small, poorly located, and offered products at higher prices than the larger and conveniently located competitor. In many cases, the location of competing companies matters in the success of a business because of comparison shopping. This is beneficial only if the business offers products of a higher quality than its competitor and at a lower price. The store was offering products of similar quality but at a higher price. Lower prices and ample parking space gave the competitor a competitive advantage.

Many businesses fail because of factors such as lack of planning, poor leadership, lack of differentiation, inability to learn from failure, lack of capital, and ignoring customer needs. Entrepreneurs need to develop certain skills and gain knowledge on how to run a business before starting one. Sources of information include print media, television, and the Internet. Successful businesses provide quality customer service, plan properly, and choose locations that are convenient to customers.

Bovee, C. L., & Thill, J. V. (2014). Business in action (8th ed.). New York, NY: Pearson.

Finlab, D. (2012). Why startups fail: And how yours can succeed . New York, NY: Apress.

Smith, J. (2012). Smarter business start-ups: Tips and techniques to start your dream business . Oxford, England: Infinite Ideas.

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The Real Reason Why Most Businesses Fail (And What to Do About It) The part of our brains with critical thinking skills is turned off - here's what you can do to activate it at will.

By Dr. Eugene K. Choi • May 14, 2021

Opinions expressed by Entrepreneur contributors are their own.

The Bureau of Labor Statistic published that 70% of business owners fail by their 10th year in business. What most people don't know is the underlying reason for why this is the case. It turns out that for about 70% of our adult lives, the part of our brains that is capable of our best critical thinking skills, revenue generation skills, and problem solving skills is actually turned off.

The reason for it is this:

Volatility, uncertainty, complexity, and ambiguity

In the leadership space, these elements are commonly referred to as VUCA . Your brain naturally likes to avoid VUCA at all costs. This is hardwired in us from our cavemen ancestors who avoided areas of uncertainty due to the risk of being killed by a wild animal. However, when it comes to entrepreneurship, we need to move through the uncertainty because the solutions to the problems we are trying to solve are not known yet. Hence the importance of being adaptable to iterate in order to move towards better outcomes.

But if VUCA is activating the survival state that prevents you from succeeding in business, then why is it on for so much of your adult life? Even though you're rarely in life-threatening situations now?

It's because the brain feels it needs not to just survive physically, but emotionally. Research has shown that emotional pain can be just as painful as physical pain. The amount of stress, frustration and anxiety entrepreneurs face on a daily basis because of VUCA tends to trigger the part of the brain that only knows how to be reactive. This is why emotions like fear, anxiety, and frustration trigger the short-sighted survival response. As a result, the brain's most needed functions for entrepreneurs are shut off. When your brain is in this reactive state, it cannot think.

When 86.3% of small businesses make less than $100K per year with a good chunk of that going right back towards expenses, it's no wonder the business owners are consistently in a survival state. The brain equates money with survival because it's what puts food on the table and a roof over your head, but when you're in this state trying to grow a successful business, you often make short-sighted decisions that you regret because the critical thinking and creativity centers of the brain are shut off. What's even worse is your empathy center in the brain is shut off when you're in survival, which ultimately prevents you from being able to keep your focus on the one thing that helps you generate revenue: the customer.

Related: The 6 Main Reasons Businesses Fail and How to Avoid Each

The two states of the brain

The brain is only ever in one of two states. The survival state or the executive state. Survival state is activated when the brain thinks your life is in danger. In this state, your brain goes ahead and reacts without thinking. And it can only react in one of three ways: fight, flight, and freeze.

This can be a straightforward reaction such as when one gets cut off on the road and they flip their lid and try to fight back by cutting the other person back off. Where this can cause a big problem for many business leaders is their overactive survival state causes them to fight hard and overwork themselves in an attempt to generate growth for the company. This counterintuitive approach actually severely damages the business in the long term. It leads to burnout and shortsightedness on what can help the company grow the most. When your brain is in survival state, it develops tunnel vision and looks for the nearest exit because it needs to survive from the threat. This tunnel vision hurts business leaders because they cannot see the bigger opportunities and solutions that exist around them and it constantly feels like they're putting out fires all the time.

In entrepreneurship, a classic flight response is procrastination. This often occurs as a reaction to not having full clarity on how to move forward. Another reason may be having a sense of not feeling ready or capable, which then triggers the survival brain to flee the task. This can also lead to fleeing by engaging in numbing behaviors to intentionally distract yourself, such as binge-watching television, comfort eating, or any other type of overindulgent behaviors.

This plays out as inaction or indecision, and often occurs when you are overwhelmed from the amount of work you need to complete. This survival response comes from the strategy of playing dead, where if you pretend not to exist, perhaps the problem will go away.

This fight-flight-freeze response is what often occurs when we face VUCA situations in our business. This is why we often don't feel like working and procrastinate. Or, we don't feel like working on the most important action steps that will help the business thrive.

However, it's in the executive state that you are able to access some of your brain's most critical functions that will help you uncover the solutions you are looking for in your business.

The reason for this is because you're able to activate the following:

Critical thinking skil ls

You are able to take a look at all the variables involved with a particular challenge and come up with a solution. This experience where your brain can connect the dots and finally see the solution only occurs in an executive state.

Executive function

This is the ability to make great decisions.

We need our creativity because it allows us to see things we normally wouldn't have paid attention to before. This helps our brain see new solutions and opportunities that are there, and that the survival brain would not have seen otherwise.

Many business leaders often hurt team culture because they enter into survival state. It's hard for them to see all the needs that may be communicated to them, whether it's from the employees or the customers. This occurs because the focus becomes protecting yourself when you're in survival state.

Related: 6 Lifelines That Could Save Your Failing Business

How to activate your executive state

Awareness is what will help you get out of survival state and into your executive state. You cannot change until the awareness of the real problem is there first. If you have a piece of broccoli stuck between your teeth, you don't have the power to remove it until someone points it out to you or you see it in the mirror. So the first and foremost step is to examine your own actions, and reflect on how many of them were a reactive fight-flight-freeze response.

This journey of self-awareness is the key factor to tapping into your executive state, so you can start seeing the opportunities and solutions that have always existed for you and your business. That's when you realize what you thought was the problem wasn't the real problem. And that realization is what helps you address the true bottleneck that may be affecting your business.

This is exactly why some of the most forward-thinking companies are implementing things like mindfulness meditation into their culture. There are also neurofeedback technologies that can sense whether your brain is in a survival state or executive state and train you to get out of survival on a more moment to moment basis.

These are all great starts to improving performance as we continue to find more scientific evidence around how to shift the parts of the brain that aren't serving you. So make time each day to simply observe. How often do you engage in the reactive fight-flight-freeze response?

Do you notice your triggers where it upsets you? That's a fight response.

Do you notice times you procrastinate because you don't feel like working? That's a flight response.

Do you tend to enter into indecision when you have too much work on your plate? That's a freeze response.

Whatever you notice, once you become more aware of these reactive survival reactions that significantly delay your progress, you've given yourself the power to start the process of change and improvement.

Related: 5 Reasons Why Businesses Fail (Infographic)

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Why Companies Fail—and How Their Founders Can Bounce Back

Most companies fail. It's an unsettling fact for bright-eyed entrepreneurs, but old news to start-up veterans.

But here's the good news: Experienced entrepreneurs know that running a company that eventually fails can actually help a career, but only if the executives are willing to view failure as a potential for improvement.

The statistics are disheartening no matter how an entrepreneur defines failure. If failure means liquidating all assets, with investors losing most or all the money they put into the company, then the failure rate for start-ups is 30 to 40 percent, according to Shikhar Ghosh, a senior lecturer at Harvard Business School who has held top executive positions at some eight technology-based start-ups. If failure refers to failing to see the projected return on investment, then the failure rate is 70 to 80 percent. And if failure is defined as declaring a projection and then falling short of meeting it, then the failure rate is a whopping 90 to 95 percent.

"Very few companies achieve their initial projections," says Ghosh. "Failure is the norm."

Why Start-ups Fail

Start-ups often fail because founders and investors neglect to look before they leap, surging forward with plans without taking the time to realize that the base assumption of the business plan is wrong. They believe they can predict the future, rather than try to create a future with their customers. Entrepreneurs tend to be single-minded with their strategies—wanting the venture to be all about the technology or all about the sales, without taking time to form a balanced plan.

“In Silicon Valley, the fact that your enterprise has failed is actually a badge of honor.”

And all too often, they do not give themselves wiggle room to pivot midstream if the initial idea doesn't jibe with customer demand.

"Instead of going into the venture with a broad hypothesis, they commit in ways that don't allow them to change," Ghosh says. He cites as an example the failed dot-com-era grocer Webvan, which bought warehouses all over the United States before realizing that there was not enough customer demand for its grocery delivery service.

Next, there's the matter of timing, a huge issue that can determine whether a company gets funding and whether it achieves the start-up's elusive measure of success: an exit that involves going public or getting bought.

During the Internet boom, companies armed with nothing more than a PowerPoint presentation of a lousy idea could secure tens of millions of dollars—which sometimes gave them enough time to figure out a viable business plan through trial and error. Eventually successful companies such as Netscape and Open Market went through several business models before finding one that worked. But the opposite was true after the boom; a company could have a great idea and a great team, but still fail to achieve traction due to lack of funding and, consequently, lack of time to let a good model mature. (These days, Ghosh says, if start-ups often manage to secure a good team and good financing, they face dozens of lower-cost competitors and fragmented customer demand.)

Funding has the potential to turn a little failure into an enormous one.

"The predominant cause of big failures versus small failures is too much funding," Ghosh says. "What funding does is cover up all the problems that a company has. It covers up all the mistakes, it enables the company and management to focus on things that aren't important to the company's success and ignore the things that are important. This lets management rationalize away the proverbial problem of the dogs not eating the dog food. When you don't have money you reformulate the dog food so that the dogs will eat it. When you have a lot of money you can afford to argue that the dogs should like the dog food because it is nutritious."

Enterprise Failure Can Be An Asset, But Personal Failure Is Ruinous

Still, stubborn entrepreneurs continue to found companies, in spite of the failure rates, which raises the question of why. It's not as if any of them harbored childhood dreams of launching a search engine optimization software firm.

Sometimes this is due to naïveté and hubris—the notion that their idea simply cannot fail. But savvy entrepreneurs know that running a company that eventually fails can actually help a career. Even failed businesses yield future networking opportunities with venture capitalists and relationships with other entrepreneurs whose companies are succeeding. Ghosh says boards of successful companies often seek out the founders and CEOs of failed companies because they value experience over a clean slate. After all, Henry Ford, Steve Jobs, and Desh Deshpande experienced multiple failures before achieving success.

“In a start-up, if a company is doing well, and a founder gets greedy and takes more than his fair share, people sort of forgive him. But when a company is going down, when you protect your own interest it's always at the cost of someone else. People don't forgive that.”

"How many search engines are out there that really matter now?" Ghosh says. "Just a handful! And yet the people who created all the other ones in the 1990s are not living under a bridge somewhere. Many of them now run the big ones. In Silicon Valley, the fact that your enterprise has failed can actually be a badge of honor."

Individual failures within a company can be an asset, too, in that they can prevent the whole system from failing—but only if the executives are willing to view failure as a potential for improvement. For instance, if the company's best salesperson is unable to sign a key customer, then the management is likely to chastise the salesperson for failing. But they could also realize that if the top talent has trouble with the sell, then maybe there is something wrong with the product. Small failures can provide the raw material for improvement.

"The more that you can embrace all the little failures you have, and treat them as ways of improving the system, the less likely that the entire system will collapse," Ghosh counsels.

That said, Ghosh warns entrepreneurs that failure of an enterprise, product, or initiative and the personal failure of an individual executive are two very different things. While the former is a learning experience that can lead to future opportunities, the latter can damn a career.

A personal failure, as Ghosh defines it, is one in which an individual does something that violates a fiduciary duty, commits a crime, or acts in a way that goes against the normal tenets of morality and fair play. Ghosh cites as example a CEO who fires a bunch of employees in order to pay for his own severance package. In such cases, a manager's reputation will be tarnished to the point of rendering him or her un-hirable even if the venture was a financial success.

"In a start-up, if a company is doing well and a founder gets greedy and takes more than his fair share, people sort of forgive him," Ghosh says. "But when a company is going down and you protect your own interests it's always at the cost of someone else. People don't forgive that."

Ironically, a personal failure often occurs because an entrepreneur is trying too hard to avoid an enterprise failure. Trying to keep the venture capitalists happy and bankruptcy at bay, the founder or CEO will resort to illegal acts such as fraud, or to morally problematic acts such as blatant misrepresentation of the company's capabilities or prospects when talking to customers or financiers. "And when you do that, you're then on the slippery slope of taking an enterprise failure and making it a personal failure," Ghosh says. "Executives do that all the time because they do not distinguish between the two."

Revising Expectations

Ghosh notes that venture capitalists could help mitigate personal failures by allowing for the expectation of company growing pains. He points out that a baseball player with a .350 average is considered to be a success, even though he has a .650 failure rate. But in entrepreneurial management, there's a tendency to see things in black and white, rather than looking at the whole picture. And while VCs are likely to recruit an executive with experience at a failed company, they are less patient with individual failures. VCs rarely consider their role in establishing unrealistic expectations or an environment where the ends are more important than the means, he says.

"In any natural system, failure is the engine that causes growth, that causes new birth, that causes anything to happen," he says. "One of the truly big differences between growing economies and economies that stagnate is the acceptance of failure. If you don't let forests burn, if you don't let the old trees die out and the new trees grow, you don't get a healthy forest. The ability to manage failure so that enterprises fail but people can still succeed becomes one of the tricks of how you build a society that can reinvent itself as the world changes.

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1. Financing Hurdles

2. inadequate management, 3. ineffective business planning, 4. marketing mishaps.

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The 4 Most Common Reasons a Small Business Fails

Running a small business is not for the faint of heart

Running a business is not for the faint of heart; entrepreneurship is inherently risky. Successful business owners must possess the ability to mitigate company-specific risks while simultaneously bringing a product or service to market at a price point that meets consumer demand levels.

While there are a number of small businesses in a broad range of industries that perform well and are continuously profitable, about 33% of small businesses fail in the first two years, around 50% go belly up after five years, and roughly 33% make it to 10 years or longer, according to the Small Business Administration (SBA) .

To safeguard a new or established business, it is necessary to understand what can lead to business failure and how each obstacle can be managed or avoided altogether. The most common reasons small businesses fail include a lack of capital or funding, retaining an inadequate management team, a faulty infrastructure or business model, and unsuccessful marketing initiatives.

Key Takeaways

• Running out of money is a small business’s biggest risk. Owners often know what funds are needed day to day but are unclear as to how much revenue is being generated, and the disconnect can be disastrous.
• Inexperience managing a business—or an unwillingness to delegate—can negatively impact small businesses, as can a poorly visualized business plan, which can lead to ongoing problems once the firm is operational.
• Poorly planned or executed marketing campaigns, or a lack of adequate marketing and publicity, are among the other issues that drag down small businesses.

A primary reason why small businesses fail is a lack of funding or working capital . In most instances a business owner is intimately aware of how much money is needed to keep operations running on a day-to-day basis, including funding payroll; paying fixed and varied overhead expenses, such as rent and utilities; and ensuring that outside vendors are paid on time; however, owners of failing companies are less in tune with how much revenue is generated by sales of products or services. This disconnect leads to funding shortfalls that can quickly put a small business out of operation.

A second reason is business owners who miss the mark on pricing products and services. To beat out the competition in highly saturated industries , companies may price a product or service far lower than similar offerings, with the intent to entice new customers.

While the strategy is successful in some cases, businesses that end up closing their doors are those that keep the price of a product or service too low for too long. When the costs of production, marketing, and delivery outweigh the revenue generated from new sales, small businesses have little choice but to close down.

The Small Business Administration (SBA) helps small businesses find loans for different needs, offering a variety of loan programs.

Small companies in the startup phase can face challenges in terms of obtaining financing in order to bring a new product to market, fund an expansion, or pay for ongoing marketing costs. While angel investors, venture capitalists, and conventional bank loans are among the funding sources available to small businesses, not every company has the revenue stream or growth trajectory needed to secure major financing from them. Without an influx of funding for large projects or ongoing working capital needs, small businesses are forced to close their doors.

To help a small business manage common financing hurdles, business owners should first establish a realistic budget for company operations and be willing to provide some capital from their own coffers during the startup or expansion phase.

It is imperative to research and secure financing options from multiple outlets before the funding is actually necessary. When the time comes to obtain funding, business owners should already have a variety of sources they can tap for capital.

Another common reason small businesses fail is a lack of business acumen on the part of the management team or business owner. In some instances, a business owner is the only senior-level person within a company, especially when a business is in its first year or two of operation.

While the owner may have the skills necessary to create and sell a viable product or service, they often lack the attributes of a strong manager and don't have the time to successfully oversee other employees. Without a dedicated management team, a business owner has greater potential to mismanage certain aspects of the business, whether it be finances, hiring, or marketing.

Most small businesses start out with the entrepreneur's savings or money from friends and family and then look for outside financing to grow.

Smart business owners outsource the activities they do not perform well or have little time to successfully carry through. A strong management team is one of the first additions a small business needs to continue operations well into the future. It is important for business owners to feel comfortable with the level of understanding each manager has regarding the business’ operations, current and future employees, and products or services.

Small businesses often overlook the importance of effective business planning prior to opening their doors. A sound business plan should include, at a minimum:

• A clear description of the business
• Current and future employee and management needs
• Opportunities and threats within the broader market
• Capital needs, including projected cash flow and various budgets
• Marketing initiatives
• Competitor analysis

Business owners who fail to address the needs of the business through a well-laid-out plan before operations begin are setting up their companies for serious challenges. Similarly, a business that does not regularly review an initial business plan—or one that is not prepared to adapt to changes in the market or industry—meets potentially insurmountable obstacles throughout the course of its lifetime.

To avoid pitfalls associated with business plans, entrepreneurs should have a solid understanding of their industry and competition before starting a company. A company’s specific business model and infrastructure should be established long before products or services are offered to customers, and potential revenue streams should be realistically projected well in advance. Creating and maintaining a business plan is key to running a successful company for the long term.

Business owners often fail to prepare for the marketing needs of a company in terms of capital required, prospect reach, and accurate conversion-ratio projections. When companies underestimate the total cost of early marketing campaigns , it can be difficult to secure financing or redirect capital from other business departments to make up for the shortfall.

Getting your company's name in front of your customers is a crucial aspect of any early-stage business. It is necessary for companies to ensure that they have established realistic budgets for current and future marketing needs.

Similarly, having realistic projections in terms of target audience reach and sales conversion ratios is critical to marketing campaign success. Businesses that do not understand these aspects of sound marketing strategies are more likely to fail than companies that take the time to create and implement cost-effective, successful campaigns.

What Is the Small Business Failure Rate?

Approximately 33% of small businesses fail in the first two years, 50% fail within five years, and 33% make it to 10 years and further.

What Are Some Signs That Your Business Is Failing?

Signs that a business is failing include small levels or lack of cash, inability to pay back loans on time, inability to pay suppliers on time, customers that pay late, loss of clientele, and an unclear business strategy.

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Home » The Tony Robbins Blog » Career & Business » 14 reasons why businesses fail

14 reasons why businesses fail

Learn more about business failure – and how to avoid it.

WHY BUSINESSES FAIL

So why do businesses fail ? What makes one entrepreneur succeed while another experiences business failure ? It comes down to a combination of preparation, strategies and knowledge. 

1. Not having an effective business plan

If you don’t have an effective business plan, you can’t properly communicate your vision to your team. Tony Robbins advocates not just having a business plan, but having a business map for entrepreneurs to take their small businesses to the next level. Your business map will help you master vital stages of the business cycle, like scaling. Explosive growth can be tempting, but not scaling in a mindful manner is one of the biggest reasons why businesses fail – you have to strike the right balance between growth and infrastructure.

2. Not putting the customer first

One of the top reasons why businesses fail is that they fall in love with their product instead of their customer. To circumvent business failure , fall in love with your client and figure out every single way you can meet their needs. Anticipate what they want, what they need and, when possible, determine what they might not even know they need yet. Turn your customer into a raving fan – somebody who will tell everybody about your product or service or company. Once you grasp that your customer’s life is your business’ life , you can truly envision how to succeed.

3. Not hiring the right people

Hiring the right people has a massive effect on nearly every area of your business. One of the most obvious examples is sales: If you don’t have enough sales, you can’t pay your team or yourself and you cannot grow. Confident salespeople are a key to increased sales. It’s also astounding how many businesses fail due to inventory mismanagement. Hiring someone who is skilled at inventory management or using a good inventory management software is an easy way to solve this issue.

4. Doing it all yourself

Yes, you are an entrepreneur, but that doesn’t mean you have to do everything on your own. A business is only as strong as the psychology of its leader – and the ability to let go and trust others is an essential leadership trait . If you need to control everything, it’s likely you won’t succeed over the long term. Delegating is a top skill to manage a business effectively : it helps you manage your time, focus your energy on what matters most and spot potential up-and-coming leaders within your company.

5. Lack of flexibility

Remember Blockbuster? Radio Shack? Tower Records? These giants of their industries all fell victim to the same reason for business failure : inability to adapt to a changing market . Entrepreneurs who fall in love with a service or product and refuse to change directions when the market demands it are likely to fail. The key to long-term success – in business and in life – is flexibility and a willingness to pivot when necessary.

6. Lack of innovation

Peter Drucker and Jay Abraham, among the greatest business minds of our time, maintain that business failure – and success ­– all starts with two key factors: innovation and marketing . Innovation means finding a better way to meet your clients’ needs than anybody else. Anybody can make some money for some amount of time. But if you want to become successful and sustain that success over years and over decades – if you want to build a brand – then you have to find a way to add more value than anybody else in the game. And that comes from constantly innovating.

7. Not understanding your industry

This is one of the driving factors behind why businesses fail to innovate. Certain industries require more innovation, while others may have different product life cycles. Consider the technology industry. The life cycle on an average product is about six months. And in some sectors, like the app business, it’s just one month. People expect continual innovation and improvement , and if you don’t deliver that to them, someone else will. It’s a different world we live in today, where the only constant is change. And if you aren’t staying ahead, you’re falling behind.

8. Fear of business failure

Business failure is one of the main , if not the biggest, fears of any business owner. If it weren’t for that fear, we wouldn’t even be asking, “ Why do businesses fail ?” However, as you develop your entrepreneurial and managerial skills, you will find that one of your greatest assets in running a successful business is overcoming your fear of business failure . Without minimizing the validity of your fears, you need to learn to view business failure as a learning opportunity rather than an insurmountable obstacle. Remember, life happens for you, not to you .

9. The wrong mindset

One of Tony Robbins’ central philosophies is that our mindsets create our realities ; what we believe influences what we are able to achieve. As entrepreneurs, when we embrace strategies for turning business failure into success, we transform our mindset from one of defeat into one of empowerment . And when we are empowered, a failing business is not the concluding chapter in our story; it is only the beginning. Don’t let your limiting beliefs disempower you. Instead, stay hungry in your search for success . Your hunger will inspire you and pay off in the end.

10. Lack of vision

Marketing guru Jay Abraham understands the question of why businesses fail. It’s a high-velocity and high-leverage mindset that prepares business owners to navigate the ever-changing seas of business. Rather than adapt your dreams to the economy, you must set and achieve your own goals, independent of circumstances. How can you accomplish this? By recognizing that business success hinges on loyalty to a vision .

11. Lack of passion

A passion-driven mindset lets you persist in honing your ethics and beliefs while learning from all the reasons why businesses fail . By adhering to your passions, you’re able to see your circumstances clearly – the positives and negatives. With this level of focus, you create an unstoppable drive to accomplish your goals. This focus allows you to take risks, acknowledging that feelings of doom and failure arise not from circumstances but from feeling stuck in the status quo. Don’t get stuck – persist.

12. Ineffective marketing strategies

Whether your company is large or small, marketing is the next critical step . Why do businesses fail in their operations? If you cannot find a way to market your product or service, then your business will have a hard time getting off the ground. Because the truth is, you could have the most innovative product or service, but the best product doesn’t always win. Do you think McDonald’s has the best burger? Probably not. But their marketing strategies are top-notch.

13. Not understanding your X factor

To market effectively and prevent business failure , you have to understand what your “X-factor” is . What are you here to deliver and how can you improve your customers’ lives? Take, for example, FedEx founder Fred Smith. Even in FedEx’s early stages when profits were slim, Smith invested in three market studies for testing the value expedited shipping would add to his product. Smith’s research paid off: He discovered his X factor and FedEx is now a household name, in large part due to its corner on the market via expedited shipping.

14. Asking the wrong questions

To help discover what your true value is as a business, go one step further and ask yourself the right questions . This includes core questions like: What does the marketplace need? Who is my customer? What can I do to make my company talkably different ? And perhaps one of the most important questions you can ask yourself is, “What business am I really in?” Let’s look at an example of a wildly successful company that needed to ask itself that very question: Apple.

How Apple came back from business failure

Today, everyone has heard of Apple. It’s one of the most valuable companies of our time, with a market cap of nearly $2 trillion and a stock that is soaring above its competitors. But it wasn’t always that way. Apple is actually the perfect example to look at when considering why businesses fail .

Apple’s founder Steve Jobs was fired from the company in 1985. Before re-hiring Jobs in 1997, the failing business operated at a loss and inched toward bankruptcy. In fact, Michael Dell was advising decision-makers to shut Apple down and give its shareholders their money back. But Apple persisted, and Steve Jobs asked himself one of the most critical questions in his lifetime: “What business are we really in?”

At first, the answer seemed obvious – Apple was in the computer business. But how were they supposed to win back customers when 97% of all computers across the United States were run by Microsoft?

That’s when they realized that no matter how good their product was, Microsoft was embedded and entrenched in the masses. After all, it was one of the main reasons Apple found itself in bankruptcy.

So Jobs asked, “What business do we need to be in?” And Apple decided that it needed to be in the business of connecting people to their passions – to their photographs, their music, to each other. When he did this, he avoided one of the top reasons why businesses fail : lack of flexibility.

Answering this question created one of the most life-altering shifts for Apple. The company transitioned into building basic, cool technology that connects people to what they love. Upon rehiring Jobs, the company arranged a partnership with Microsoft which signaled the company’s turnaround. When Apple launched the iMac just one year later, the firm returned to profitability and made its mark. Before long came the iPod and iTunes, then the iPhone. Their net sales soared. S ince that point Apple has never stopped innovating, and their marketing campaigns have propelled the company to an entirely new realm. Had Jobs viewed his firing as the death toll of his career (and company), the firm would have never experienced its revival.

Today, is Apple really in the computer business? Only 10.4 % of their business is computers, which means almost 90%  is not – the vast majority is made up of iPhone , iPad and Apple Watch sales. Honestly answering the question “ Why do businesses fail?” was vital for Apple to change course and become profitable.

If success is about innovation and marketing, then you have to decide who your customer is, what they need, what business you are in and what business you really need to be in. Answering these questions can change your entire business, because the answers will ultimately allow you to change your offer. As we say, change your offer, change your business – and change your business, change your life.

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6 Reasons Why Small Businesses Fail and How to Avoid Them

7 min. read

Updated October 29, 2023

Roughly 20% of small businesses fail in their first year, according to recent U.S. Bureau of Labor Statistics data . About 50% fail in the first five years, and only one-third of new businesses are able to survive for 10 years. Research by the Small Business Administration found that about 1 in 12 businesses close in America every year.

If you’re a small business owner, another way to think about these statistics is that 80% of small businesses will survive their first year. Over five years, you have a roughly even chance of survival or failure. Looking out 10 years, you have a one-in-three chance of enduring.

What are the reasons businesses fail to thrive, given a 50/50 chance of survival and assuming a product or service for which there’s a demand? Let’s discuss six reasons businesses fail and some ways you can avoid business failure.

• 1. Leadership Failure

Your business can fail if you exhibit poor management skills, which can be evident in many forms. You will struggle as a leader if you don’t have enough experience making management decisions, supervising a staff, or the vision to lead your organization.

Perhaps your leadership team is not in agreement on how the business should be run. You and your leaders may be arguing with each other publicly, or contradicting each other’s instructions to the staff. When problems requiring strong leadership occur, you may be reluctant to take charge and resolve the issues while your business continues to slip toward failure.

How to Avoid Leadership Failure: Dysfunctional leadership in your business will trickle down and affect every aspect of your operation, from financial management to employee morale, and once productivity is hindered, failure looms large on the horizon.

Learn, study, find a mentor, enroll in training, conduct personal research—do whatever you can to enhance your leadership skills and knowledge of the industry. Examine other business and leadership best practices and see which ones you can apply to your own.

2.  Lacking Uniqueness and Value

You may have a great product or service for which there is strong demand, but your business is still failing. It may be that your approach is mediocre or you lack a strong value proposition. If there’s strong demand, you probably have a lot of competitors and are failing to stand out in the crowd.

How to Avoid Value Proposition Failure: What sets your business apart from competitors?  How do you conduct business in a way that is totally unique? What are your competitors doing better than you are? Develop a customized approach or service package that no one else in your industry is using so you can present it as a strong value proposition that attracts attention and interest.

This is how you build a brand . Your brand is the image your customers recognize and associate with your business. Your brand identity, including your logo, tagline, colors, and all the visible aesthetics and business philosophies that represent your company should be supported by your value proposition. It should separate you from the pack and present your individual perspective to your customers. Do everything you can to present that unique value proposition to your market so you can capture a market share and begin building your conversion rates.

To publicize your brand and set yourself apart, you will also need to step up your marketing plan and use as many venues as possible to present your brand to the public. You may be far better than your competitors but that won’t make any difference if your prospects don’t even know you’re in the game. Use social media, word of mouth, cold calling, direct mail, and other tried-and-true marketing techniques. Ensure you have a well-optimized online presence, develop lead generation and contact information capture techniques such as offering high-quality content on your site, a subscriber newsletter, and information giveaways.

3.  Not in Touch with Customer Needs

Your business will fail if you neglect to stay in touch with your customers and understand what they need and the feedback they offer. Your customers may like your product or service but, perhaps they would love it if you changed this feature or altered that procedure. What are they telling you? Have you been listening? Or is the market declining? Are they even still interested in what you’re selling? These are all important questions to ask and answer. Maybe you’re offering a product or service that is fallen well below trend.

How to Avoid Losing Touch with Customers: A successful business keeps its eye on the trending values and interests of its existing and potential customers. Survey customers and do market research and find out what their interests are and keep abreast of changes and trends using customer relationship management (CRM) tools. Effective use of CRM can help keep your business from failing.

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4.  Unprofitable Business Model

Akin to leadership failure is building a company on a business model that is not sound, operating without a business plan , and pursuing a business for which there is no proven revenue stream. The business idea may be good but failure may come in the implementation of the idea if there are no strategic guidelines in place.

How to Build a Good Business Model: Research and review the way other businesses in the industry operate. Develop a complete business plan that includes financial forecasting based on predictable revenue, strategic marketing, and challenge management solutions to overcome potential obstacles and competitor activities. Create a milestone chart with specific tasks and objectives assigned along the timeline so you can measure success, solve problems as they occur, and stay on track. A sound business model that incorporates best practices can help your business avoid failure.

5.  Poor Financial Management

SmallBizTrends.com, a business news resource, offers this infographic which states that 40 percent of small businesses make a profit, 30 percent come out even, and the remaining 30 percent lose money.

You must know, down to the last dime, where the money in your business is coming from and where it’s going in order for your business to succeed. Your business can also fail if you lack a contingency funding plan, a reserve of money you can call upon in the event of a financial crisis. Sometimes people start businesses with a dream of making money but don’t have the skill or interest to manage cash flow , taxes, expenses, and other financial issues. Poor accounting practice puts a business on a path straight to failure.

How to Avoid Financial Mismanagement: Use professional business accounting software like QuickBooks or Xero to keep records of all financial transactions, including every expenditure and all revenues received, and use this information to generate income statements (profit and loss statements). Even better if you use a business dashboard tool like LivePlan that makes it easy to monitor your financials. This is valuable information that you need to run your business, know where you stand at all times, and keep it operating in the black. If you lack skill in financial management, consider hiring a small business advisor and professional bookkeeper or certified public account to help manage your financial affairs.

6.  Rapid Growth and Over-expansion

Every now and then a business startup grows much faster than it can keep up with. You open a website with a trending product and suddenly you are inundated with orders you are not able to fill. Or perhaps the opposite is true. You are so convinced that your product is going to take the world by storm that you invest heavily and order way too much inventory and now you can’t move it. These are both additional paths to business failure.

How to Avoid Growth and Expansion Problems. Business growth and expansion take as much careful and strategic planning as managing day-to-day operations. Even well-established and successful commercial franchises such as fast-food restaurants and convenience stores conduct careful research and planning before opening a new location. They measure local and regional demographics and spending trends, future development plans for the area, and other pertinent issues before they move forward. You must do the same for your business to avoid failure.

Conduct thorough research to ensure the time is right and the funding is available for expansion. Make sure the initial business is stable before expanding to an additional location. Don’t order inventory you’re not sure you can sell but have a plan already in place to fill orders quickly should the demand present itself. The key to successful growth and expansion—and avoiding business failure—is strategic planning.

• Avoiding business failure starts with planning

If 50% of new businesses fail, then 50% of new businesses can succeed. Starting a business is an exciting endeavor that requires a clearly defined product or service and a strong market demand for it. Whether you desire to start a new business or you’re already running a business, you must understand that success depends on careful strategic planning and sound fiscal management that begin prior to startup and continue throughout the life of the business.

See why 1.2 million entrepreneurs have written their business plans with LivePlan

Mike Kamo is the VP of marketing for Strideapp. Stride is a Cloud-based CRM and mobile app that helps small- to medium-sized agencies manage and track leads, as well as close more deals.

Table of Contents

• 2.  Lacking Uniqueness and Value
• 3.  Not in Touch with Customer Needs
• 4.  Unprofitable Business Model
• 5.  Poor Financial Management
• 6.  Rapid Growth and Over-expansion

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Why Do Some Companies Thrive While Others Fail?

Researchers in the growing field of organizational ecology say it's vital to look at the entire life cycle of the business, including the failures.

August 01, 2002

What makes some businesses sprout, grow, adapt, and succeed, while most never get off the ground? Researchers in the growing field of organizational ecology say it is not enough to study the companies that thrive. Answers lie in the stories of failure.

Bitten by the technology bug and drawn by the scent of riches, 10 men got together in a garage on Alma Street, Palo Alto, to launch a start-up company. They never made it. The venture collapsed before any sustained manufacture of their dream product.

The year was 1908, and the new, new thing that drew these entrepreneurs was the internal combustion engine. Their firm, the Stanford Automobile and Manufacturing Co., shared the same fate as the Divine Motor Car Co. of Chicago, McHardy of Detroit, and more than 1,600 others that entered the industry between 1900 and 1920, only to fade into oblivion.

For one group of scholars, however, the very existence and varied fates of these myriad enterprises do matter. With the dogged determination of census takers, these researchers enumerate whole populations of organizations—not just the Fords and Chevrolets of an industry, but also the lesser-known and short-lived businesses that make up the majority of firms.

They call their approach “organizational ecology.” This perspective tries to capture the full range and diversity of corporations, through their birth, growth, transformation, and mortality. Organizational ecology yields insights into how industries develop and change over time. Many of the findings in the field have challenged conventional wisdom about competition, demanding the attention of policy makers and business leaders alike.

In December, 2002, proponents of organizational ecology will celebrate the discipline’s 25th anniversary at a conference to be held at Stanford GSB. The Farm has provided a particularly fertile ground for scholars working within this research tradition. Organizational ecology can trace its birth to a 1977 paper coauthored by Stanford sociologist Michael Hannan, who is now the StrataCom Professor of Management at the Business School.

One of Hannan’s students, Glenn Carroll, has been prolific in adding to the organizational ecology literature. Carroll, who is the School’s Lane Professor of Organizations, in turn taught William Barnett, now a colleague in strategic management and organizational behavior—creating, so far, a three-generation chain of organizational ecology scholars under one roof at the Business School’s Knight Building. “They’re calling me the grandfather of the conference. They joke that it’s my retirement event,” says Hannan, hastily adding that he is not quitting anytime soon.

The research program grew out of a mounting unease with organizational studies’ prevailing focus on large, dominant firms. Hannan’s intuition was that there is a lot of diversity within industries, with hundreds of firms that people don’t notice. He also took issue with the assumption that organizations are plastic and changeable—if so, why is failure so common? Organizations are characterized by inertia, he felt, and there are good reasons for this. Reliability and accountability are valued attributes of organizations. These qualities are strengthened by predictable routines and structures, which create inertia as a byproduct.

Hannan was looking around for conceptual models for working out these kinds of arguments when he came across exciting new work in what seemed a totally unrelated field: population ecology. Ecologists in the early 1970s were exploring several new approaches. “That had a big impact on me,” Hannan says. With John Freeman of the University of California, Berkeley, he wrote the seminal paper “The Population Ecology of Organizations.”

The research tradition’s name tends to provoke suspicion. Business people might say that it’s a jungle out there, but surely serious scholars shouldn’t confuse man-made organizations with the world of plants and animals. The academics stress that, indeed, their approach is not about turning organizational studies into a natural science. “Ecology was used as a source of inspiration,” Carroll says, “but not as a source for understanding organizations.” The ecological twist to organizational studies includes an emphasis on the fact that each organization’s environment is made up of other organizations. It also shifts the analysis up from a single organization to the level of whole populations of organizations.

Most industry studies would define the relevant players as companies that have opened for business. This doesn’t satisfy the organizational ecologists. They note that before an organization is formally launched, the founders have to work hard developing their plans and assembling resources. Some of these activities culminate in successful births, but others are aborted or stillborn. Studies that begin at the organization’s legal incorporation or commencement of production thus underestimate mortality rates and the degree of difficulty involved in entrepreneurial activity.

The automobile industry is a case in point. In a 1994 study, Carroll, Hannan, and their collaborators looked at producers and preproducers—defined as firms that had begun some form of organizing effort but had not reached production—for almost a century since 1886. They found that historians and economists have tended to overlook the astonishing number of hopeful producers, especially in the industry’s early years. They count 3,845 preproduction organizing attempts in the United States, of which only 11 percent succeeded in transitioning to the production stage.

Collecting data of this kind is no walk in the park. It usually involves hundreds of hours of interviews and archival research. Tracking down members of a population and recording their characteristics requires the tenacity of a detective on a chase and the attention to detail of an archaeologist on a dig. Clues come from unlikely sources. For the auto industry study, researchers relied partly on the 1,568-page Standard Catalog of American Cars 1805–1942 published for vintage car hobbyists and collectors. Carroll’s study on the microbrewery movement drew on collectors of beer mats.

Organizational ecologists suggest that the failure to appreciate the full diversity of organizations within an industry may translate into weak policy. “For example, in current policy debates concerning the competitiveness of a nation’s firms in the international marketplace, this issue often gets analyzed on the basis of a few anecdotes or highly publicized cases,” Carroll and Hannan write in their book, The Demography of Corporations and Industries. Similarly, discussions about the ability of Western nations and Japan to meet the pension burden of baby-boomers tend to focus on national social security systems and large old corporations, when in fact the greatest needs are generated by small new firms lacking private pension coverage.

Today, there is an international network of some 100 scholars working through an organizational ecology perspective. The approach has merited an entry in the forthcoming International Encyclopaedia of the Social Sciences (2002) and is recognized as a core specialty in organizational studies textbooks. A growing number of industries have been scrutinized through this lens, ranging from disk drive manufacturing to wineries and from airlines to auditing.

The Nature of Competition

One of the main insights of organizational ecology is that the environment of a firm is made up largely of other firms. Scholars in this tradition therefore have looked closely at how organizations affect each other. A key theory put forward in the original paper by Hannan and Freeman is “density dependence,” which says that organizations’ vital rates—their founding rates, growth, and mortality—depend on the total number of organizations within the relevant population. Population density is said to have two separate effects: through legitimation and through competition.

Legitimation is the process by which a certain way of doing things comes to be seen as natural or taken for granted. Legitimation increases founding rates and reduces mortality rates. Competition arises when organizations need to rely on the same pool of resources, such as capital and customers. Competition has the opposite effect of legitimation: It reduces founding rates and raises mortality rates.

Rising population density increases both legitimation and competition. However, the force of legitimation is stronger when the population density is rising from a low base, such as in the early history of an industry. The competition effect is stronger at higher densities. Combining both effects, the theory predicts that founding rates will show an inverted U-shape relationship with density, first rising as legitimation increases, then falling as competition kicks in. For the same reason, mortality rates should show a U-shape pattern, falling at first, then rising. The basic tenets of density dependence theory have been widely accepted and demonstrated to apply in many contexts.

A newer take on the organizational environment is the “Red Queen” theory, which highlights the relative nature of progress. The theory is borrowed from ecology’s Red Queen hypothesis that successful adaptation in one species is tantamount to a worsening environment for others, which must adapt in turn to cope with the new conditions. The theory’s name is inspired by the character in Lewis Carroll’s Through the Looking Glass who seems to be running but is staying on the same spot. In a 1996 paper, William Barnett describes Red Queen competition among organizations as a process of mutual learning. A company is forced by direct competition to improve its performance, in turn increasing the pressure on its rivals, thus creating a virtuous circle of learning and competition.

Barnett and David McKendrick of the University of California, San Diego, have tested this theory against data on the global hard disk drive industry. Tracking more than 150 firms over four decades, they found that those with a history of enduring competition had a higher chance of survival than those that avoided competition by technological or geographic differentiation. In line with Red Queen theory, it appears that isolation from competition, while having short-term advantages, deprives an organization of the long-term benefit of an ecology of learning, thus stymieing innovation. Their study also suggests that a lack of domestic competitive experience can prove to be a critical disadvantage when a firm is thrust into global competition.

Aging and Adapting

Organizational ecology has helped to illuminate what happens to industries over time. Many other studies have suggested that young organizations suffer a so-called “liability of newness” and have a higher risk of failure than old ones. Research in organizational ecology challenges this conclusion. Its more comprehensive data suggest that what seems like the effect of age might really be an effect of size: Infant companies may be vulnerable because they are small, not because they are young. When size is taken into account, the liability of newness often is canceled out by the liability of obsolescence.

One of the key challenges that organizations face as they age is the need to adapt to changing circumstances. Hannan’s original hunch continues to be borne out by organizational ecology research: Change is easier said than done. The social and economic environment at the time of an organization’s founding can have an enduring impact on its mission, structure, and operation. Those that try to transform core elements of their structure often experience increased risk of failure.

The scholars do not claim that organizational change is always dangerous. In the context of dramatic environmental shift, it may be necessary and beneficial to change core organizational features. However, in most cases the process of change itself can be so disruptive in the short term that the organization never gets to see the long-term benefit.

The opposing view, that organizational change is helpful and simple, may arise from case studies of successful organizations—the kind found in popular management books. These star firms may have undergone successful transformations, but their experience is not representative of the vast population of firms. “It is tempting—and many analysts succumb—to infer from this information that, had other organizations attempted the same changes, they too would have experienced success. Unfortunately, this inference comes from considering data that are heavily biased toward the successful firms,” Carroll and Hannan write.

Of course, an enduring industry, taken as a whole, can be seen to adapt to its changing environment. But organizational ecology holds that the driving mechanism for an industry’s evolution is unlikely to be the adaptation of its individual firms. Instead, it is through the selective replacement of outdated organizations that industries adapt. In the airline industry, for example, the once-dominant Pan Am, TWA, and Eastern are all no more. Old household names in retailing such as Montgomery Ward, Sears, and J.C. Penney have given way to Wal-Mart and Target. And steel giants such as Bethlehem and U.S. Steel have lost out to mini-mills such as Nucor. Thus, companies die while industries evolve. One of the current forays in this research direction is the Stanford Project on Emerging Companies, or SPEC, which Hannan directs together with James Baron, the Walter Kenneth Kilpatrick Professor of Organizational Behavior and Human Resources.

The project tracked the evolution of nearly 200 high-technology startups in Silicon Valley between 1980 and 1996, and was later extended to mid-2001, creating probably the most comprehensive database on the histories, structures, and human resource practices of this global center of entrepreneurship.

The study found several different basic models for employment relations. The most common was what the researchers call the “engineering” model, which involves selecting staff based on specific task abilities, using challenging work as the basis for employee attachment to the firm, and controlling and coordinating employee effort through peer groups. Some firms later transitioned to a “bureaucracy” model, in which control becomes more formalized.

The researchers have found that—in line with organizational ecology’s theories about the disruptive effects of change—companies that reorganized their human resource blueprints tended to suffer higher employee turnover and diminished performance. Enterprises in which the blueprint changed were more than twice as likely to fail as similar firms with blueprints that were stable. Over a three-year period, the latter firms grew at almost triple the rate of the former.

Personnel changes at the top are not disruptive as such. It is when chief executives change employment relationships that staff turnover increases. In fact, changing the blueprint seems to be most disruptive when it is implemented by the company’s first CEO, who then stays on. This could be because the founder CEO’s continued presence serves as a reminder that the organization has deviated from its original model.

The findings are especially significant, the scholars note, because it is hard to imagine a setting in which constant flux is more prevalent and where organizational change seems more justified than Silicon Valley. Given the benefits of staying the course, the authors recommend that entrepreneurs should pay more attention to picking an appropriate organizational model from the start. The study challenges the view—popular in the heyday of Silicon Valley’s “built to flip” ethos—that steady organization-building is passé in a new economy flying at Internet speed.

They add that the initial blueprint at founding should be a compromise between the current and the expected future needs—a point that few company founders seem to care about. “It’s by no means uncommon to see a founder spend more time and energy fretting about the scalability of the phone system or IT platform than about the scalability of the culture and practices for managing employees,” write Hannan and Baron.

A quarter-century since the publication of his seminal paper, Hannan says his own thinking has evolved. As one looks more closely at what exactly these organizational forms are that make up a population, it is clear that they are not merely manifestations of formal technical features. “It’s clear that they are social constructions, rooted in identities, and at some level as cultural as you can get,” he says.

Hannan does not claim to be setting the agenda for organizational ecology. The scholars in this area draw on certain shared analytical ideas but, like the industries they study, organizational ecology today is marked by theoretical diversity. This is good news, Hannan says: “It assures that talented young people still join it.” It may not be long, therefore, before they start calling him a great-grandfather.

Old Assumptions Challenged

Organizations change easily and often. Actually, the research shows inertia reigns. The relevant players in an industry are companies that have opened for business. Industries are also shaped by ideas from companies that are aborted or stillborn. Companies without competitors have the best chance of survival. Companies with enduring competition are better survivors. New organizations are the most likely to fail. It is not their youth but their small size that is the biggest risk factor. Personnel changes at the top of a company are disruptive. It is more disruptive for existing executives to change the company blueprint.

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4 Reasons Why Managers Fail

• Swagatam Basu,
• Atrijit Das,
• Vitorio Bretas,
• Jonah Shepp

Nearly half of all managers report buckling under the stress of their role and struggling to deliver.

Gartner research has found that managers today are accountable for 51% more responsibilities than they can effectively manage — and they’re starting to buckle under the pressure: 54% are suffering from work-induced stress and fatigue, and 44% are struggling to provide personalized support to their direct reports. Ultimately, one in five managers said they would prefer not being people managers given a choice. Further analysis found that 48% of managers are at risk of failure based on two criteria: 1) inconsistency in current performance and 2) lack of confidence in the manager’s ability to lead the team to future success. This article offers four predictors of manager failure and offers suggestions for organizations on how to address them.

The job of the manager has become unmanageable. Organizations are becoming flatter every year. The average manager’s number of direct reports has increased by 2.8 times over the last six years, according to Gartner research. In the past few years alone, many managers have had to make a series of pivots — from moving to remote work to overseeing hybrid teams to implementing return-to-office mandates.

• Swagatam Basu is senior director of research in the Gartner HR practice and has spent nearly a decade researching leader and manager effectiveness. His work spans additional HR topics including learning and development, employee experience and recruiting. Swagatam specializes in research involving extensive quantitative analysis, structured and unstructured data mining and predictive modeling.
• Atrijit Das is a senior specialist, quantitative analytics and data science, in the Gartner HR practice. He drives data-based research that produces actionable insights on core HR topics including performance management, learning and development, and change management.
• Vitorio Bretas is a director in the Gartner HR practice, supporting HR executives in the execution of their most critical business strategies. He focuses primarily on leader and manager effectiveness and recruiting. Vitorio helps organizations get the most from their talent acquisition and leader effectiveness initiatives.
• Jonah Shepp is a senior principal, research in the Gartner HR practice. He edits the Gartner  HR Leaders Monthly  journal, covering HR best practices on topics ranging from talent acquisition and leadership to total rewards and the future of work. An accomplished writer and editor, his work has appeared in numerous publications, including  New York   Magazine ,  Politico   Magazine ,  GQ , and  Slate .

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The backlash against diversity, equity and inclusion in business is in full force − but myths obscure the real value of DEI

Professor of Sociology, Arts & Sciences at Washington University in St. Louis

Disclosure statement

Adia Harvey Wingfield does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

Arts & Sciences at Washington University in St. Louis provides funding as a member of The Conversation US.

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Few ideas in business are as misunderstood as DEI.

While opposition to DEI – diversity, equity and inclusion – has a long history, it has picked up steam recently.

In 2023, when Silicon Valley Bank collapsed, detractors claimed that the bank’s focus on DEI was responsible – rather than the bank overinvesting in bonds that suddenly lost much of their value.

Not long afterward, when a wall panel detached from an Alaska Airlines flight at 16,000 feet, opponents claimed without evidence that DEI’s corrosive effects were to blame.

More recently, when a cargo ship lost power and slammed into Baltimore’s Key Bridge, critics suggested that DEI was somehow at fault .

In the face of these attacks, many company leaders are troublingly silent about their commitment to DEI. I believe this is a mistake. It allows misrepresentations to take root, and it reinforces the exclusion and marginalization many workers of color already experience .

As a sociologist who focuses on race, gender and work , I believe this is a pivotal moment for companies to reinforce their commitment to DEI.

A history of DEI

For starters, it’s useful to take stock of how American companies moved to DEI in the first place, and how diversity practices are typically structured.

For the overwhelming majority of U.S. history, workers who weren’t white men weren’t just legally banned from leadership roles; they could be barred from holding any role in an organization.

The formal exclusion of women of all races and men of color didn’t become illegal until the passage of the Civil Rights Act of 1964. That means that for nearly 200 years after the country’s founding, white men had virtually unrestricted and exclusive access to the levels of power in all organizations.

The objective, meritocratic past that DEI critics imagine is thus a myth. The centuries-long, systematic exclusion of white women and people of color gives lie to the idea that jobs have historically gone only to the most qualified.

After the Civil Rights Act, companies moved to address the new reality that the racial and gender discrimination that had been practiced with impunity for generations was now illegal. Affirmative action policies were one way organizations sought to address past and ongoing discrimination, and many companies, at least for a time, sought to close racial and gender disparities.

But by the 1980s, backlash to these goals was ascendant. Legal decisions such as the Supreme Court’s 1978 Bakke ruling allowed organizations to consider race as one of many factors when they evaluated applicants but specifically outlawed the use of quotas. Companies could thus consider race as part of a package but, contrary to popular opinion, could not hire candidates simply because they were Black (or from another marginalized group).

They could, however, consider diversity as a compelling interest that justified using race as one of a variety of factors in making decisions about hiring. A company that had no Black workers on its entire staff could thus seek to diversify, taking race into account alongside experience, qualifications, education and other criteria when considering a candidate.

What this hypothetical company could not do is simply hire a Black worker based exclusively on their race.

Diversity initiatives today

In the wake of ongoing backlash, most companies today have moved even further from trying to alleviate ongoing racial and gender disparities. Instead, they embrace the form of DEI that’s under harsh criticism today.

But today’s DEI doesn’t necessarily entail a focus on hiring or promoting more Black workers. It doesn’t even always focus on race. Instead, many DEI managers have sought to focus their efforts more broadly on diversity of thought, region or opinion as a way to avoid the kind of pushback they’re encountering today.

Additionally, companies often rely heavily on DEI practices such as mandatory diversity training or brief workshops with external consultants that actually depress the numbers of Black workers – and other workers of color – in leadership roles.

Today’s critics cast DEI as unfairly advantaging unqualified Black workers, but the reality is that companies stopped focusing on closing racial disparities long ago.

The numbers bear this out. While white men constitute only 30% of the U.S. population, as of 2017 they made up 80% of members of Congress, 85% of corporate executive officers, 95% of Fortune 500 CEOs and 97% of heads of venture capital firms.

The business case for diversity

Clearly, DEI is not reshaping America’s most powerful institutions in a way that places significant numbers of Black workers in leadership roles.

Instead, researchers know that obstacles such as hiring discrimination , wage inequality , hostile organizational cultures and blocked routes to advancement still persist for highly qualified, skilled and motivated Black workers.

The irony is that the data shows very clearly that diversity is correlated with clear benefits to organizations. Companies with more racial and gender diversity among managers boast more profitability and more innovation than those without. They have advantages in recruitment, employee satisfaction and responding to market changes and consumer needs.

Organizations that are genuinely committed to DEI aren’t losing sight of the big picture; rather, they’re investing in their long-term financial success.

For purely self-interested reasons, then, companies should be offering a full-throated defense of DEI. Instead, they’ve been in retreat .

For example, law firms are walking back programs designed to attract lawyers of color, even though the legal profession is overwhelmingly made up of white workers . Similarly, efforts to increase venture capital funding to Black women are under attack , even though in 2018 less than 1% of a total of US$130 billion raised went to firms headed by women of color . And major tech companies are shifting resources away from post-2020 investments in DEI, even though Black workers remain significantly underrepresented in that industry as well.

DEI practices that work

It doesn’t have to be this way. Companies can still rely on evidence-based DEI practices that show results. One approach involves establishing mentoring programs that are open to everyone. Another is cross-training workers so they can build their skills in various parts of a company while at the same time broadening their networks. And a third tack includes investing in flexible, family-friendly workplace policies that send a message to workers that they and their needs matter.

None of these programs are reserved for members of any particular racial group, so they’re within the bounds of the law. The beauty of this approach is that even though these initiatives are race-neutral, research indicates they benefit workers of color more than mandating annual diversity training .

In addition to using measures like these that work, I believe it’s important for corporate leaders to stand up for DEI precisely because it’s under threat.

Some are doing this already. Jamie Dimon of JPMorgan Chase recently described himself as a “full-throated, red-blooded, patriotic, unwoke, capitalist CEO” who still plans to maintain the bank’s commitment to DEI, particularly when it comes to the approaches that are shown to net results. The celebrity businessman Mark Cuban has been similarly outspoken in support of DEI, unequivocally describing it as “good for business.”

Given that research shows workforce diversity helps companies boost profits , it’s surprising to me that more leaders don’t take this approach. The alternative is letting a false narrative that imperils their growth go unchallenged.

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Food and beverage start-ups: How to succeed where others fail

11-Apr-2024 - Last updated on 11-Apr-2024 at 08:30 GMT

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Let’s be honest, starting a new company in any industry is not easy. In fact, it’s nerve-shreddingly difficult, and comes with a whole heap of financial and reputational risks. So why do so many start-ups fail and how do others succeed?

Why is it so difficult to create a successful start-up? ​

Entrepreneurs face a whole range of challenges when founding a new company. From securing the initial business loan or investment, to securing distribution channels, it’s an uphill struggle. But ask the people on the other side of that struggle, who’ve made it from start-up to established brand, and I’m sure they’d say it's worth it.

However, there’s no denying that many companies won’t make it to that stage.

According to market trends firm, Exploding Topics, 10% of start-ups across all industries will not survive past the first year. A further 70% of start-ups will fail during the following four years. And a total of 90% of start-ups will fail overall. Yes, these are bleak numbers, but knowledge is power and understanding the risks will help to ensure that the decision to create a new business is not taken lightly and that all the necessary preparations are made. But why do so many start-ups fail?

“There are lots of reasons for start-ups to fail,” said Stephen Minall, founder of FDReviews, while speaking at IFE 2024. “Maybe it’s a husband and wife team that gets divorced or a brother and sister partnership who fall out.”

However sufficient funding is, by far, the main reason that new businesses fail.

“New businesses often run out of money,” adds Minall. “It’s very very difficult to do it on a shoestring now.”

Another major issue, faced by food and beverage start-ups in particular, is actually getting their products into shops in order to sell them.

“Most of the supermarkets are very difficult to get into,” says Minall. “A supermarkets is not a TARDIS, if your product goes on the shelf then something else has to give way.”

So what can you do to help mitigate these risks and give yourself the best chance of success?

How to help your start-up succeed ​

Do your homework: ​ Make sure you know as much as you possibly can about the industry, including your supply chains, your production plans and your competition.

“Do your research,” says Minall. “Go into supermarkets, look at the shelves, look at the shelf space to make sure your product actually fits the shelf height. I’ve seen hundreds of brands where the bottle’s the wrong size or the jam jar looks lovely but you can’t get the product out.”

Grow your network: ​ Get to know people across your industry who can advise you on the different stages of creating, launching and growing your business.

“You may well find that there are different people who have different expertise who can help you at different parts of your journey,” says Bruce Isaacs, partner at Hospitality Management Solutions.

Set goals: ​ Make a clear plan for how you want the company to develop so you know what you want to achieve and by when.

“Get some KPIs in place so you can measure your progress,” says Dan Barron, non-executive director at Just So Care Ltd.

“KPIs are crucial” agrees Isaacs.

Speak to a business consultant ​: Consultants can guide you through some of the more complex business processes and advise you on fundamental decisions. But choose that consultant carefully as you’ll be financially invested in them and they’ll be having an influence over the success of your company.

“Look at their LinkedIn, get case studies from them, tie your contract to results and trust your instincts,” says Daniela Busseni, senior consultant at IGD

Find the right distribution channel for your product: ​ You don’t necessarily need to sell your product through a supermarket, particularly in the beginning when your brand and your products are unknown. There are multiple alternative options, including online shops such as Amazon.

“There are Amazon experts out there that can help you if you want to go the ecommerce route,” explains Minall. “But don’t just think multiples. If you’ve got a product that can be sold in bulk than you can sell it into manufacturers, you can sell it to farm shops – there are thousands and thousands of farm shops, delis and garden centres.”

Be open to change: ​ Your circumstances may change throughout your first year but if you can adapt to those changes and recognise the aspects of your business, which are not working, then you have a greater chance of success.

“The reality is, the business you end up with will not be the one you have in your business plan,” says Isaacs. “They’ll be something that will happen and opportunities will change, meaning that the business looks different.”

And perhaps most importantly, “make those changes whilst you still have the budget to make them,” says Barron.

Don’t lose hope when things don’t work: ​ There will almost certainly be aspects of the business or a particular product idea which won’t succeed. But that’s okay, not everything will work out perfectly and not every product will succeed.

“Don’t take it personally, it happens to everyone,” says Tim Davies, founder of DuelFuel. “Steve Jobs failed at Apple in the first couple of years and look what happened.”

“It’s a learning journey,” agrees Busseni. “It’s not about failure.”

But more than anything else, “enjoy the process,” adds Davies.

“It’s not easy, but guess what, it’s a lovely business to be in,” concludes Minall.

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Why Do We Dislike Inflation?

This paper provides new evidence on a long-standing question asked by Shiller (1997): Why do we dislike inflation? I conducted two surveys on representative samples of the US population to elicit people’s perceptions about the impacts of inflation and their reactions to it. The predominant reason for people’s aversion to inflation is the widespread belief that it diminishes their buying power, as neither personal nor general wage increases seem to match the pace of rising prices. As a result, respondents report having to make costly adjustments in their budgets and behaviors, especially among lower-income groups. Inflation also provokes stress, emotional responses, and a sense of inequity, as the wages of high-income individuals are perceived to grow more rapidly amidst inflation. Many respondents believe that firms have considerable discretion in setting wages, opting not to raise them in order to boost profits, rather than being compelled by market dynamics. The potential positive associations of inflation, such as with reduced unemployment or enhanced economic activity, are typically not recognized by respondents. Inflation ranks high in priority among various economic and social issues, with respondents blaming the government and businesses for it. I also highlight a substantial polarization in attitudes towards inflation along partisan lines, as well as across income groups.

This is an earlier version of the paper prepared for the Spring 2024 Brookings Papers on Economic Activity (BPEA) conference and the final version of this paper will be published in the Spring 2024 BPEA issue. I thank Carola Binder, Janice Eberly, Yuriy Gorodnichenko, Francesco Nuzzi, and Jon Steinsson for helpful comments and feedback. I am deeply grateful to Alberto Binetti, Filippo Giorgis, and Alfonso Merendino for excellent research assistance. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.

MARC RIS BibTeΧ

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