Retail Failure - Essay Example

? Organizational failure is discussed in different terms as there is no consensus on what constitutes failure. Terms such as exit, decline, bankruptcy, are often conceptualized as failure. Failure is basically the inability of the firm to adapt to the changing business environment leading to exit or turnaround (Mellahi & Wilkinson, 2004). Failures can have positive consequences – firms learn from failures. The retail sector globally has been experiencing failures and a study of the causes of failures is essential as it would help develop models to predict failures (Sharma & Mahajan, 1980). Failures and bankruptcy cannot occur overnight. The symptoms start showing years ahead of the actual failure. According to Mellahi, Jackson and Sparks (2002) organizational failure can occur due to changes in both the external and internal business environment, but failure is necessarily caused by the external factors over which the managers have no control, contend Sharma and Mahajan (1980) and Mellahi and Wilkinson (2004). This is because the external environment imposes pressures and constraints on the firm’s strategies that can lead to failure. This suggests that firms do not fail due to the inefficiency of the management but they fall victims of the external environment. Changes in customer tastes, brand switching, cyclical decline in demand, competitive rivalry, technological uncertainties due to product and process innovations, are some of the external factors that can lead to organizational failure (Mellahi, Jackson & Sparks, 2002). In addition, retailers undergo the ‘wheel of retailing’ where they start as low cost, low set business offering modest products but as they develop, they add to the ambience, the products and then they make themselves vulnerable to the other new entrants. Circumstances lead to the inability to respond to the threats of the business. This suggests management inefficiency as the cause of organizational failure. This is precisely what occurred at A Goldberg & Sons Plc (AGS). Without any strategic planning and leadership, AGS offered interest-free credit to customers for three months. Following up payments required huge investments in back-office operations. It was initially based in Glasgow but as population was shrinking in Glasgow they opened stores in neighboring locations. When trading conditions became difficult, they sought new trading opportunities. Their decisions were such that at one point they were confused whether they were retailers or consumer finance company (Pal, Medway & Byrom, 2006). They operated under uncertain micro-environment conditions; they changed their format and refurbished their stores when the real estate market was at its height. Failure at AGS was a multi-factor issue. There was no top management homogeneity and hence continuity and growth was also affected. Each decision maker had his own perception and this was based on the micro- and macro- environment prevalent during his tenure. Managers also tend to become blinded to their own weaknesses and strengths, to the customer demands and to the competitors (Mellahi, Jackson & Sparks, 2002). Once success is achieved, overconfidence and arrogance steps in. When organizations become conditioned to exploit their old advantages, they become vulnerable to failure. They either ignore or do not respond to new opportunities. These are internal inadequacies in dealing with external threats. Impulsive decisions, poorly informed managers and the habit of taking unwanted risks are also some of the causes that can cause failure. Managers fail to react to external threats and they continue to focus on the internal methods that were successful in the past. Marks & Spencer’s (M&S) the legendary UK retailers, referred to as ‘managerial giant in the western world’ by Peter Drucker, was recognized as one of the best managed companies in the world. It started facing survival crisis since 1998. M&S were blinded by their past success and refused to advertise (except for new store openings) or make any other marketing efforts as they felt their offerings were enough to attract shoppers. They were also rigid about not accepting major credit cards which was a major deterrent to sales. They did little to change the store environment for years. By 1990 new retailers and some specialty retailers had entered the market introducing new approaches. Discounters had also entered to capture the value-conscious market. All of these were stronger, more aggressive and confident competitors. They were spending on advertising to create powerful brand image. Competitors moved to new locations whereas M&S remained confined to the central locations. Over time the prices they charged were higher and the quality inferior than the competitors. While for most organizations the causes of failure can be the inability to respond to the changing internal and external environment, at M&S too management failed to react to the changes in the business environment (Mellahi, Jackson & Sparks, 2002). Leaders within the group wanted to maintain their status quo. M&S lacked visionary leadership. Companies that achieve success can evaluate and value innovation. They have visionary leadership, who believe in empowerment of workers, and they believe in trying new approaches (La Vere & Kleiner, 1997). This provides the business cohesiveness and continuity; changes in the world are addressed and not resisted as in the case of M&S. Failures can be predicted based on the performance indicators which are the symptoms of failure. These can predict business failure of retail establishments over the five-year period prior to the actual failure (Sharma & Mahajan, 1980). Ineffective management can lead to mistakes in strategic planning or implementation and this reflects in the deterioration of the performance indicators. If this is not identified in time or no corrective action is taken, the result is failure. For success in the retail sector the value system of the organization is important. The front-line employees in the retail sector have to embrace the firm’s purpose and character (Berry, Seiders & Gresham, 1997). Each organization’s value system may have distinct properties, but it ultimately amounts to creating a superior shopping experience and compelling value for customers. Regardless of the size of the retailer, the common trait that has emerged as responsible for the success is a strong and vibrant value system. Employees feel a pride in and develop an emotional commitment towards the company. This was observed and suggested by the authors in the late 1908s when M&S was at the peak but its decline started soon thereafter. M&S lost contact with the customer needs and wants and focused on satisfying its internal customers (Mellahi, Jackson & Sparks, 2002). Hence, the employees may share the same value system as the organization but what is important is that the value system itself should be aligned with the purpose and corporate goals. Even at the time the authors observed the cause of high performance in the retail sector, more than 100,000 retailers had filed for bankruptcy in the US. According to Mellahi and Wilkinson (2004), the Industrial Organization (IO) perspective suggests that managers or decision makers cannot be held responsible for firms’ failure because they would work in the best interest of the organization. However, this cannot be held true in every case. The management may not be willing to adapt to the changing environment as in the case of M&S. This has been confirmed by Mellahi, Jackson and Sparks (2002) when they state that management’s lack of vision, lack of the ability and the will to respond effectively and make changes to hold the decline are some of the internal factors that can cause firm failure. Sales margins declined and consolidation started taking place in the retail sector (Bhargava, Dubelaar & Scott, 1998). In 1992 and 1993, retail concerns comprised of the largest single category of corporate business failures (McGurr & DeVaney, 1998). Large retailers such as Macy’s, Revco, Circle K, Southland and Ames have filed for bankruptcy protection. The retail firms have specific characteristics which can be identified through a review of their financial statements, cash flow statements and their financial ratios. Even if the average financial ratios of the retail industry remains stable over time, economic recessions and periods of growth affect the industry as a whole. The retail industry is subject to economic cycles and this brings about changes in the industry average rations. For instance, if just-in-time inventories are held, it reduces current assets. Over time, this can affect all other ratios. This implies that firms are impacted by the external environment. Various failure prediction models have been developed but these vary across sectors. Moreover, biases exist in calculations and hence the failure prediction models have limited use. Sull (1999) is of the opinion that when business conditions change, the most successful companies are the slowest to adapt. When such companies are confronted with challenges from the external environment, the management does take action but inappropriate action. Active inertia or inaction on the part of the managers or the decision makers is the reason. The managers are unwilling to change the current trajectory. At best, they would accelerate their tested activities instead of considering why the change is necessary and how it should be implemented. This is what happened in the case of M&S. M&S tried to duplicate the UK business model, in Canada and they failed. The clothing requirement and the supply chain issues differ in these two countries but were never addressed. Investments were made recklessly in Canada and there were no synergies in activities. They had no overall apparent strategy but stuck to their belief that their business model was excellent. They relied on their St. Michael brand to hold meaning internationally. Burt, Mellahi, Jackson and Sparks (2001) find that in international retailing, the business model has to differ across nations and culture. M&S remained shackled in their existing relationships with customers, employees, suppliers and shareholders, the assumptions and the shared values become dogmas and these binders can stifle an organization (Sull, 1999). It can lead to eventual failure because the vision for growth is stunted. In describing the failures in international retailing Burt, Dawson and Sparks (2001) find that causes of failures could range from cultural distance to internal management. Failure in retail internationalization is difficult to study but the authors propose that several factors would be looked into as the possible causes of failure. These include country risk, operational failures, cultural and psychic distance, entry mode, age and size of the firm, the length of time in a country, managerial competency, and degree of adaptation. All of these fall under the two basic heads – external and internal business environment. Arnold (2002) studied six international retailers – Ahold, Carrefour, Home Depot, Benetton, IKEA and Wal-mart. Each of these firms demonstrated inspirational leadership, motivational organization culture, innovative spirit, they give importance to community needs and are customer-focused. They also maintain effective relationship with their vendors. These organizations have people orientation; leadership is essential to steer the organization through periods of innovation and growth. The employees share the same organizational values and customers were their top priority. While prediction models fail to predict accurately, the general trend in failures, bankruptcy and economic downturns is that the management should be able to sense it in advance. Financial failures can cripple the economy (Krugman, 2008) and similar failures in any industry can cripple the industry. However, the tools to deal with the situation should be right. It may create temporary barriers to growth and development but once the situation is handled efficiently, the sector can spring back to normal. The external factors are critical but then the internal factors have to be strong and capable to respond to the external environment. Whichever approach one takes for failures, they try to underestimate the influence of all other reasons and approaches. The same internal factors can have different outcomes across firms operating in different business environments. Research above suggests that no firm can have control over the external business environment or remain independent of the external environment. However, they can have control over the internal environment. They can adapt to changes in the external environment. This is internal efficiency and effective management. This requires visionary leadership, helping the workers to align with the organizational goals, motivational attitude and steering the firm towards innovation and growth during the economic recession. Resistance to change and adhering to the past assumptions, values and dogmas create barriers to growth and ultimately failure. References Arnold, S 2002, 'Lessons learned from the world’s best retailers, International Journal of Retail & Distribution Management, vol. 30, no. 1, pp. 62-570. Berry, LL Seiders, K & Gresham, LG 1997, 'For love and money: The common traits of successful retailers', Organizational Dynamics, Autumn 1997 Bhargava, M Dubelaar, C & Scott, T 1998, 'Predicting bankruptcy in the retail sector: an examination of the validity of key measures of performance', Journal of Retailing and Consumer Services, vol. 5, no. 2, pp. 105-117 Burt, S Dawson, J & Sparks, L 2003, 'Failure in international retailing: research propositions'. International Review of Retail, Distribution and Consumer Research, vol. 13, no. 4, pp. 55-373. Burt, SL Mellahi, K Jackson, T & Sparks, L 2002, 'Retail internationalization and retail failure: issues from the case of Marks and Spencer'. International Review of Retail, Distribution and Consumer Research, vol. 12, no. 2, pp. 91-219. Krugman, P 2008, 'Success Breeds Failure', The New York Times. 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