The Dow Jones Industrial Average is a market index of some of the largest publicly traded firms in the world. It was first published on Feb. 16, 1885 and was comprised of 12 firms. Of those original firms, only one -- General Electric -- exists today
Think about it: The Dow Jones Industrial Average is supposed to be made up of the biggest, most successful firms and yet about 92 percent of the original firms in the index no longer exist.
These non-existent firms either dissolved, went through bankruptcy or were acquired by other companies. Each of these scenarios represents some measure of failure to grow. If the biggest, most successful companies can fail, then a company of any size can fail. But why do companies fail?
Related: Stop Embracing Failure
The truth is that most company failures can be avoided so long as business leaders understand the variables that give rise to failure. In many cases, these are the same variables that give rise to success, and they are comprised of resources and opportunities.
- Brand -- The promise you make (and keep) to your customers
- Capital -- Investment funds necessary for growth
- Products -- The things you sell that deliver value to customers
- Other assets -- Your people, core competencies, intellectual property, etc.
- Customers -- Willingness of people to pay you for the value you deliver
- Innovation -- Ability of technology to lower costs and / or improve quality
- Disruptive trends -- Changes in the rules of the game
- Macro economics -- Changes in the way customers evaluate options
If necessity is the mother of invention, then resources are the catalysts for opportunities.
Businesses fail when there is a strategic misalignment of resources to opportunities. (Vice versa, companies succeed when the opposites is true.) Most often, this strategic misalignment is driven by three root causes; these include the following:
Poor management: This doesn’t necessarily mean that a business’ leaders are bad people or even that they don’t know how to manage; poor management means that poor decisions are made and this can happen for a number of reasons.
Management may not be fit for purpose -- they may not simply know how to respond to internal or external changes that have taken place. Management may be unwilling or unable to change the culture of an organization -- impairing the ability of the business to succeed. Management may be spread too thin and focused on too many objectives -- each of which is moving too slowly to deliver positive impact.
Lack of clear data: In cases when management is strong, companies may still fail when there is a lack of clear data to inform management decision. Lack of clear data can take several forms.
Data may not be properly defined, and / or management may be looking at the wrong data set(s). Data may be historical or predictive and it may be oriented around financial investments, organizational efficiency, sales performance, cost containment or customer retention. In some organizations, data is not properly defined, and so it is evaluated through the wrong lens. Strong sales, for example, might paint a rosy picture of growth, but if bad debt and/or customer returns are not being evaluated, a company might not have a clear view of all the data that is driving its performance.
In other cases, data is simple not captured, cleansed or reviewed. This is often especially the case with many smaller businesses. Many small businesses believe (incorrectly) that data and / or analytics are too overwhelming, time-consuming or expensive to implement. The truth is that many businesses can evaluate their performance on three to six key performance indicators (KPIs). Much of the time, these KPIs are a function of sales performance and include the following:
- Cost / lead
- Cost / customer
- Revenue / customer
- Customer retention
- Sales close rate
- Days it takes to close a sale
These six KPIs can be broadly defined to many companies -- large and small -- inclusive of online businesses, off-line businesses, B2B, B2C, professional services and products or goods.
Short-term focus: Finally, many companies fail because they do not align their actions today with their goals for tomorrow.