Why Do Businesses Fail?

It is well known that the financial crisis which started in 2008 is a worldwide recession. Even the Lehman Brothers Holdings, which was a global firm with a high reputation, went bankrupt on September 15th, 2008. Lehman Brothers Holdings failed because it was unable to retain the confidence of its lenders and counterparties and because it did not have sufficient liquidity to meet its current obligations. (Anton R. Valukas, March 11th, 2010) Undoubtedly, the impact of Lehman’s bankruptcy was tremendous and it included a fall in NY stocks, approx 5000 Lehman staff lost their jobs and a series of small banks collapsed.

(Gary Duncan, Sep 16th, 2008) It is widely hold that the risk, along with the interest, in business is so ordinary and ranges according to the scale of a form that, one day; it is possible that another big corporation may go bankrupt without any warning. Indeed, the recession may roll over the business world again. This essay will present five reasons why businesses fail and will list some actions which may help corporations to avoid bankruptcy. The five reasons will be divided into two parts: internal and external.

Firstly, there are three internal reasons, which are failure in market strategy, quantity over quality and lack of diversification. Initially, the failure in market research is to blame. Corporations do substantial research, which is closely related to the expectations of future markets, before they investigate in a new product or area. That is to say, market research and expectation are two determinants of a market strategy. More to the point, market research and expectation are equally vital for market strategy. For instance, Edsel, a model of Ford, launched in September, 1957, with high expectations, failed to gain expected profit.

Although, the researchers of Ford had done tremendous market research on the car industry for 10 years before Edsel was brought out, they failed to consider the economic environment and the recession of the stock market as well as the change of the preference of customers. Due to this fault, Edsel was no longer produced after 19th November, 1959. As mentioned above, market research and expectation are equally vital and can’t be separated. Without one of the two determinants market strategy and even the whole business of a company fail.

Therefore, the chief problem for a manager is how to make a profitable and successful market strategy, managers hiring a professional consultant company and incorporate the characters of their corporations into the advises may help make a better market strategy. Secondly, the reason of why businesses fail is the quality of products. It is perhaps a common phenomenon that most manufacturers take the external value (number) over the internal value (quality), because number is easier to count while quality is hard to measure. Nevertheless, it is quality determines the profit manufacturers can receive from a product.

In September2006, Sony Corporation, the world’s second-largest consumer electronics manufacturer had announced a world-wide recall of its notebook batteries after some of these batteries had caught fire. Analysts pointed out that most of the batteries were produced during the frequent adjustment of equipment production line, which would possibly take the response of the poor quality of batteries. Consequently, as cited in “Sony’s Battery Recall Fiasco”: In October 2006, Sony announced that its net profit for the second quarter (July 06 – September 06) had dropped to 1.

7 billion yen (US$ 14 million), when compared to 28. 5 billion yen (US$ 234. 7 million) for the same period of the previous year. (Sony’s Battery Recall Fiasco, 2007). Besides the numerous costs, Sony’s reputation had also been seriously damaged by the battery problem. There are numerous examples of ‘quantity over quality ’, no matter how big the company is. Some of the quality mistakes bring uncountable cost, while some bring companies to the end of their businesses.

As a result, better quality than quantity should be advocated as a regulation before companies start any strategies. On the other hand, the government should strictly control the quality of products and make a more detailed policy on standards to stimulate corporations focus on the quality of their products. Last but not least, the subject of diversification. It is well known that, the fluctuation of the economy is unavoidable and one corporation, if they only produce one product, the fluctuation will inevitably influence the corporation.

Fortunately, corporations can learn from the principle of investment portfolios, which divides the risk into pieces and would definitely decrease the probability of failure. Even though corporations who only focus on one product seem to gain higher quality, it is not necessarily the truth it might be a struggle for corporations to survive in competitive circumstances. Next comes the problem of how to manage the portion of every product and how many products should a corporation afford to minimize the risk of failure while gain a higher profit? The number of possible answers is quite vast.

For example, making decisions fitted with the corporation’s real situation, making full use of mathematic models to decide the number of the category, hiring professional corporations for consultant, etc. Besides there three internal reasons mentioned above, there are two external reasons: government policy and the price of raw materials, which are compulsory and unchangeable to corporations. As mentioned above, government policy is the order made by the government according to the current economic status and trend. It is hard to predict exactly when and how the policy will change.

Interest rates, for instance, will surely impact on the economy regardless of its decline or rise. Corporations can only adjust to the change and discover a way to survive from it. Therefore, it is vital for managers to keep an eye on changes of policies, make plans according to the current markets and predict economic trends to avoid failure. Another external reason is the increase of the price of raw material. Admittedly, the price of raw material has no impact on service industry; however, it does play a vital role in product industry.

In addition, since the price of raw material is a determinant of the price of the selling products, it is obvious that if the price of raw material rises, so will the price of the final product and vice versa. Along with the price of the product increase, profit will decline as well as the corporation’s market share. Take the steel industry for an example, the price of iron ore raised at the beginning of 2010 in China, because Chinese failed to negotiate with the manufacturer of iron ore in Australia. As a result, numerous small steel companies closed and big companies lost a great deal of profit at the same time.

Some companies, however, such as XinXing Cast tube and AnShan Steel survived because of technical innovations and improved efficiency of their staff, which probably compensated the increased price of raw material. Therefore, although companies cannot change the price of raw material, they can still keep their price advantageous through other methods. To sum up, the five reasons mentioned above are all vital determinants in why businesses fail. Obviously, this essay doesn’t include every aspect of business situations and, of course, all sorts of reasons leading to business failure.

This essay focuses on how corporations can avoid these five failures in their operations. However, the realistic financial market is far more complicated to predict. Therefore, paying close attention to financial market and economic trends and policies as well as the changes of customers’ preference will do a great deal to help a business be successful. (Words count: 1,258) Reference 1] Andrews, L. (2009) Growth management: two hats are better than one. New York: Palgrave Macmillan. 2] Duncan, G. (2008, September 16). Lehman Brothers collapse sends shockwave round world.

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