There is no step-by-step formula that will guarantee success in the fast changing and dynamic environment in which businesses operate. There is no blueprint that can be followed to achieve lasting business success.
New and old businesses make mistakes and some of which can be fatal. The following are some of the most common reasons for business failure.
Not making something customers need
The main killer of businesses is not making something customers need. It is vital to have a product or service that customers truly value and for which they will pay a premium.
The key is to understand exactly what customers want and to give it to them.
“A product is not a product unless it sells. Otherwise it is merely a museum piece.” Ted Levitt
The target market is too small
Your target market must be large enough to build a sustainable business.
Is the total market for the product or service large, rapidly growing, or both?
Is the industry now, or can it become structurally attractive?
The “build it and they will come” approach is dangerous!
Poor pricing strategy
The traditional methods such as cost-based and competition-based pricing will not work. Neither of these methods takes account of value to the customer.
You need to use target costing and value-based pricing to succeed in today’s highly competitive market place. You need to focus on profit instead of volume or market share.
Pricing power is probably the most valuable asset for business success. According to Warren Buffet, the leading investor, it is the most important factor that he looks at when evaluating a business.
Poor cash flow management
Cash flow is the life blood of all businesses and is the key indicator of business health. In the current credit crunch environment, where access to liquidity is restricted, cash management becomes critical to survival. It is estimated that cash flow problems cause half of all small business failures in the UK.
You need to ensure that the working capital cycle is as short as possible by managing your debtors, creditors and inventory period and avoiding over-trading, over-financing and over-investment.
Too much money is as dangerous as too little
The key is to get just enough money to get started and test the business model, but not so much that the business is insulated from market tests. It is important to learn early whether the product or service has the potential to be profitable.
It is important to keep a tight grip on cash - not just because conserving cash will help businesses to survive longer, but also because it is a sign of the correct attitude - that the company is serious about succeeding in the longer term.
For example, Autonomy was founded in 1996 with less than $5,000. The company was bought by HP for $11 billion this year. http://www.bbc.co.uk/news/business-14584871 Cost control is not enough
Controlling costs is not enough. You need to use a cost reduction programme to eliminate waste and drive costs down continuously. For example, Kaizen costing is based on the belief that nothing is ever perfect, so improvements and reductions in the variable costs can always be made.
Failure to innovate
To be really successful, continuous innovation and generation of new ideas are needed. Simply relying on customers to ask for a solution will not be enough. The key is to understand how customers work, what they need today, and where they are headed in the future. As Henry Ford said:
“If I had asked my customers what they wanted, they would have told me a faster horse.”
The best and most successful innovations are the ones where a company delivers something that the customers did not even know they needed but cannot live without.
In the end, the real test is not just whether you can come up with new ideas and solutions, but if the ideas and solutions can be turned into cash.
