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Why Businesses Fail: 6 Common Reasons Explained

April 14, 2024

why businesses fail

Change is the new constant for businesses.

Entire industries can be disrupted seemingly overnight due to constant changes in technology, consumer behavior, and the market itself. Companies that fail to keep up with the shifting tides risk getting left behind.

Over the last two decades, the business landscape has transformed, leading to the disappearance of 52% of the Fortune 500 companies and 72% of the original FTSE 100 companies from 1984.

This trend of business decline and failure is not slowing down; it's expected to accelerate, driven by the ongoing digital revolution, which offers established enterprises and new market entrants unparalleled opportunities to disrupt the status quo and capture market share. 

However, it also creates a competitive terrain for businesses to navigate through. 

This article will examine the six fundamental reasons that contribute to the decline or failure of businesses, ranging from innovation gaps to strategic missteps, and the critical importance of staying agile in a rapidly changing digital economy.

Reasons why businesses fail

Businesses, particularly startups, face an uphill battle for success. A number of factors can contribute to their downfall — from poor decision making and misaligned market strategy to unsuitable company culture and product quality issues.

Understanding these common pitfalls is essential for anyone looking to navigate the often choppy waters of the modern business world.

1. Losing the lead in innovation

When companies have dominated a static marketplace over a long time, overconfidence and complacency are to be expected. What’s worked for years should surely work for years to come.

But that's not always the case.

According to a survey by McKinsey, 94% of executives aren’t satisfied with innovation performance within their organization. Only a third of UK business leaders believe they’re innovating successfully enough to generate revenue or reasonable growth.

Just because a company was successful and innovative once doesn’t mean they’ll be able to maintain it. This can be due to various factors, including internal culture problems, budget issues, insufficient strategy and vision, and an inability to act on signals crucial to the future of the business.

Resting on your laurels in the fast-moving digital economy is effectively waiting to be disrupted by established companies and new industry entrants. Failure to innovate, enhance, or evolve your products or services represents a significant risk.

2. Poor strategic decisions

Success and failure ultimately rests on the effectiveness of a business’s decisions.

Whether it’s entering into a new partnership, expanding through investment and acquisitions, adjusting pricing points, or launching and removing products, the wrong choices can halt progress and see a once-thriving organization go backward.

A global survey by McKinsey suggests that only 5% of leaders believe their organization excels at decision making. What’s more troubling is that 70% of business leaders would rather delegate this responsibility to a robot.

So why do organizations make poor strategic decisions? Why does a company overextend itself or get key choices all wrong? It often boils down to a lack of quality data to make objective decisions.

It’s estimated that over 80% of companies lack real-time insight and instead rely on outdated data. What’s the consequence? A similar percentage of businesses are making wrong or sub-optimum strategic decisions and, therefore, losing revenue.

Without sufficient data, decisions default to experience or intuition, increasing the margin for human error. Poor strategic decisions by key stakeholders are a significant burden on organizations.

Industry research suggests that 61% of companies have missed a strategic opportunity or suffered a financial setback because they didn’t adequately understand the competitive landscape.

The potential cost? It’s estimated that for a typical Fortune 500 company, it’s 530,000 days of managers’ time each year or around $250 million in annual wages!

3. Reacting too slowly

Every organization in the world has the potential to be affected by changes in the market.

That could be a change in a competitor’s product, marketing or sales strategy, a new product, feature, or service entering the market, or legal and political updates, such as new legislation.

All businesses need to be ready to adapt to survive. But even that may not be enough. History is littered with examples of businesses that have reacted to threats and opportunities in their market but done so too slowly to halt a decline in revenue.

In the digital economy, where changes occur more frequently than ever before, the risks are endless. Businesses can encounter threats from three potential sources.

First up are established players who can quickly steal a march with their vast resources and expertise. The next is the risk from established giants in other industries. According to a PWC’s Future of Industries survey, 56% of CEOs believe a large existing player from another industry will move into their industry.

Finally, 50 million start-ups are launched every year across multiple industries. These smaller, more nimble, and risk-taking businesses can move and react much faster than their larger counterparts, putting the latter at risk of decline.

In many instances, organizations either know about the impending threats and do little to counter them or are unaware of what’s about to happen. Either way, by the time they react, the market has already been disrupted, leaving them to play catch up.

4. Marketing strategy not aligned with industry trends

Technology isn’t the only factor altering the business landscape. The world is ever-changing, and so are consumers’ values, cultural norms, and behaviors.

In recent years, we’ve seen attitudes change towards environmental issues, mental health, gender equality, and more. Accenture research shows that around 70% of millennial consumers will choose a brand over another if it demonstrates inclusion and diversity in its promotions.

A Nielsen study also revealed that 73% of millennials will spend more on a product from a sustainable and socially conscious brand. At the same time, 81% expect the brands they buy into to be transparent in their marketing.

All of these cultural, attitudinal, and behavioral changes have played a big role in how organizations are marketed. But for every good example, there are plenty of established brands that have misjudged the prevailing sentiment of the time.

Millions have been spent on marketing campaigns — from strategy to execution to media budget — only to have been withdrawn in the face of public backlash. While many of those brands have been stable or big enough to withstand the financial impact, others haven’t fared so well.

There are notable examples of businesses declining rapidly following a marketing misstep and misjudged strategy. It costs businesses revenue and people their jobs and gives rival businesses opportunities to move ahead in the market.

5. Unsuitable company culture and losing the talent war

About 94% of entrepreneurs and 88% of job seekers say that a healthy culture at work is vital for success.

For businesses that get the culture right, the rewards are clear. They’re able to recruit and retain the best people. But for those who get it wrong, the costs can have catastrophic consequences.

A report by SHRM in 2019 shows that bad work culture cost American businesses $223 billion in the preceding five years alone! But what does it mean for individual businesses?

An inability to hire, or hire well, will also cost businesses thousands. The estimated cost of a bad hire is £30,000 ($38,000). This leads to more time wasted in the market and sky-high fees for recruiters. Likewise, if the broader company culture has significant problems, it can trigger a talent exodus and accelerate a company’s decline.

We live in an age of transparency thanks to review sites, social media, and other forms of user-generated content. As a result, both positive (philanthropic activities or training opportunities) and negative cultural traits bullying or limited opportunities) are more visible in the public realm. The leadership styles that were acceptable 20 years ago are no longer fit for purpose.

6. Product or service quality issues

Complacency is one of the biggest factors in declining companies.

If the quality of their product or customer service doesn’t get the care, attention, and investment it requires, it will inevitably lose its relevance to the people who once used it.

Even a gradual decline in quality is likely to tarnish customer perceptions and undermine the proposition that the company has been built on. As customer satisfaction falls, they’re more likely to voice their concerns and opinions via the plethora of online platforms they have access to.

The damage to the brand and brand loyalty can push once prominent organizations to lose their position in the market

In many cases, the quality issues aren’t always a decline but rather a case of standing still while the market moves forward. A failure to embrace the latest technological trends, for example, could cause a product to lose relevance to consumers who are ready for more advanced solutions to their problems.

This is naturally compounded by the activity of competitors or new entrants in the market that have developed modern, forward-thinking propositions that offer the best quality service and experience.

A good example of this is businesses that have failed to digitize their offline processes or experiences.

How to protect your market share

So, what lessons can a business learn to best protect its market share?

In short, a business’s proposition should be an evolving entity. Because, in 10 or 20 years, it’s likely to be a very different proposition that dominates the market. If you don’t invest in and develop what you offer, or you’re not willing to disrupt yourself, another business will.

But how do you make the right investments? How do you ensure you don’t reinvent yourself at the wrong time—as many brands have done before?

The key is to keep listening and learning, staying close to your customer base. You can do that through surveys and review scores, as well as by monitoring their sentiment towards your brand and that of your competitors. Recognizing how they’re feeling and talking about the products and services in your market can help you identify and solve their issues.

It’s also essential to monitor the competitive landscape, analyzing what other businesses offer and what they do to innovate. It can help you identify threats to your market share and unexplored opportunities that can fuel your growth.

Finally, as we operate in this new digital era, staying abreast of technological advancements is vital. You must embrace the right innovations in your proposition and the processes behind them. Digitizing your business, products, services, and experiences can save people time and effort, which will help you stay relevant in the years to come.

Closing thoughts

The decline or failure of businesses can often be traced back to a combination of the six reasons outlined above. 

To thrive in the current business environment, companies must prioritize continuous innovation, make informed strategic decisions, remain agile and responsive to market changes, align marketing strategies with contemporary consumer values, cultivate a positive company culture, and uphold the highest standards of product or service quality.

The digital age presents both challenges and opportunities, and success belongs to those who can navigate these waters with foresight, agility, and a commitment to continuous improvement.

Learn how competitive intelligence in SaaS has evolved and gain an edge in the industry.

Edited by Jigmee Bhutia

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Why Businesses Fail: 6 Common Reasons Explained Learn about the six major reasons why businesses struggle in the current environment and how to best protect your market share.
Richard Jackson Richard Jackson is the Chief Executive Officer and Co-Founder of WatchMyCompetitor (WMC), a London-based competitor intelligence solution company. He was previously Chief Technology Officer for CitiGroup’s Corporate Bank.

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