Why do Firms Fail to Grow - Essay Example

?Why Firms Fail To Grow? Before going into the discussion regarding why most of the entrepreneurs fail to grow their businesses, let us get a better understanding of what an entrepreneur actually is. An entrepreneur is a person who owns a business and takes considerable steps to make the business grow in the market. “Characteristics of an entrepreneur include spontaneous creativity, the ability and willingness to make decisions in the absence of solid data, and a generally risk-taking personality” (Wallener, 2011). An entrepreneur having these characteristics has the ability to achieve fast growth. The point of concern is that in the today’s world, most of the entrepreneurs do not possess these characteristics and that is the reason why they are not able to grow their businesses successfully. An entrepreneur should be able to understand all business practices and cross-cultural issues in order to make a permanent place in the market. Understanding of the cultural, political, and economic environments of the country is also very important for an entrepreneur to be successful. There exist many reasons, which stop the firms from making a rapid growth. Some of the most significant reasons include poor execution of strategies, improper management structure, unfriendly economic environment, unskilled staff, lack of capital, lack of quality services, improper use of profits, overhead costs, unavailability of the technology, overexpansion, and ineffective marketing planning. These factors make it very difficult for most of the firms to grow rapidly and successfully in the market. Let us discuss all of these factors in some detail in order to get a better understanding of the issue. Improper Management Structure Improper management structure is one of the reasons behind the failure of most of the firms. A firm needs appropriate management structure not only to grow but also to survive in a market. When the management structure is not well structured, it causes downfall of the business. Some managers believe that their businesses completely depend on them and there is no one except them to look over the business properly. In such cases, the managers are at mistake because a business is run by the cooperation of every person involved in the business. Management of a business cannot be done by one or two individuals rather a business requires the efforts of all of the employees working for the firm in order to be successful. A proper management structure is very critical for the growth of a business. A single person cannot control a firm employing a large number of people. The managers of the businesses need to transfer controls to the employees in order to motivate them and also to make them feel valued. In this way, the employees begin to work hard for the firm, which results in increasing the productivity and profitability of the business. A single person does not have all required skills and abilities to run a business. For the proper management of a new business, different areas of a business such as finance, purchasing, selling, production, and hiring and managing employees require the efforts of different people having relevant educational and professional backgrounds. Therefore, the managers should not only empower the employees but also should make them take appropriate decisions for the proper growth and development of the firms. Poor Execution of Strategies One of the main reasons why most of the firms fail to grow in the market is poor execution of business strategies. Most of the managers do not possess the ability to develop and implement appropriate business strategies. A well-developed strategy is a key towards success of a business. A business cannot stand among its competitors without having a well-structured business plan. It is because a business plan includes appropriates set of actions which make a business grow in a market. So without having clear goals and objectives and without looking at different aspects of the business, it becomes very difficult for an entrepreneur to make the business grow. An entrepreneur needs to have a complete understanding of all business issues in order to develop a suitable business strategy. However, the development of a business strategy does not work alone because a business fails if the mangers although develop a well-structured business strategy but do not execute it properly. Therefore, a new firm not only needs a well-planned business plan but also needs the plan to be executed properly in order be successful. Economic Environment Economic environment of the country in which a firm operates, also plays a critical role in the success or failure of a new business. Sometimes, firms start their businesses in those countries where the economic environment is not very stable or where there is less number of opportunities for the entrepreneurs. In such cases, chances of failure increase because a new business needs friendly environment not only in terms of economy of a country but also in terms of investment opportunities in that country. When the economy of a country in which the firm plans to start its business is not business friendly, the firm cannot develop its business and consequently, it faces failure. Economic environment not only refers to the economic strength of the country where the firm intends to carry out its business activities but also refers to the financial strength of the firm itself. Such firms face failure, which do not have enough capital to operate their businesses. Money is the key towards growth of a business. If a firm does not have enough capital to develop the business in other markets, the business cannot grow. Therefore, managers of the new firms not only need to examine the business environment of the country in which they wish to operate their business activities but also they need to analyze their own financial strength before going on to develop their business. Unskilled Staff Another reason why a large number of firms fail to grow is that some managers hire unskilled staff on low wages. Skilled staff is a key to success for any new firm. A firm can never achieve its desired goals and objectives without the efforts of its employees and if employees are not skilled enough to perform their job responsibilities in a proper way, the results are never good for the firm. Unskilled staff means such employees who are either not very well educated or those who do not have experience required for any specific job. Such employees do not ask for higher pays and agree to work for the managers on low wages. Some managers hire such staff at the start of the business with a concept that the firm will replace them once the business starts flourishing. They do not have in their mind that skilled staff is essential for the growth of the business right from the start. Unskilled employees lead to decreased productivity and profitability because they do not possess enough experience and professional qualifications required for the job. Such staff can never be able to do something appreciable for the firm because they have no experience of making a business flourish and gain competitive advantage in the market. Therefore, managers must hire well-qualified and talented staff in order to make the business grow and earn profit for the owners. Lack of Quality Services Lack of quality services is another reason behind the failure of the new firms. The managers of new firms do not have much experience of how to attract customers and how to satisfy them. When a new firm starts operating its business activities, it needs to attract the customers through proper advertising and promotion strategies and once the customers start placing orders to the firm, it needs to provide them with quality services in order to satisfy them. Customers come to the firm only if they are satisfied with the quality of services that the firm provides to the customers and if they are not satisfied, they reject the services of that firm and go to other firms present in the market. It is very difficult for a new firm to grow rapidly in a market where there is lot of competition. Proper execution of business strategies and provision of quality services are the most important steps towards growth of a business. Entrepreneurs should first analyze the business strategies and services of the existing firms before entering into the market. It is because once the managers get an in-depth knowledge of the working of major firms; they will be able to offer something more valuable to the customers in order to attract customers. Therefore, proper analysis of competing firms, proper execution of strategies, and provision of quality services to the customers are some of those steps, which are essential for a business to flourish in any existing market. Improper Use of Profits Another reason behind failure of new firms is that most of the firms make improper use of profits. If the owner of a firm does not reinvest the profit for flourishing the business, it means he is making inadequate use of earned profits. Businesses grow only if the owners make adequate use of profits such as investing back into the business, buying latest machinery, and arranging proper location for the firm. Reinvesting in the business in order to increase productivity and to satisfy the customers by providing them with quality services result in growth of the business. Therefore, owners of the businesses should try to reinvest in the business instead of wasting the profits in non-business activities. Overhead Costs Managers of some firms are not able to manage the salaries, production costs, and maintenance costs of the businesses, which results in increasing the overhead costs for the firms. Companies with a lot of overhead expenses and low profits are not able to grow rapidly in the market. Therefore, the managers should keep the production and maintenance costs low in order to decrease the overhead costs. Unavailability of the Technology Another reason for why firms fail to grow is unavailability of the technology. Some firms do not have latest technology that is required to increase productivity of the firm. This is the era of technology and no firm can make a rapid growth without making proper use of technology. Glenn (2001) asserts, “The world of technology dramatically impacts the growth of a business”. Use of technology brings various benefits to the companies such as increase in the productivity, increase in the market share, and reduction of costs. Therefore, entrepreneurs who are able to achieve fast-growth, make great use of technology in carrying out the business processes. Overexpansion Overexpansion is also a factor behind business failures. Some firms tend to expand very rapidly without looking at the available capital and resources that are needed to maintain a business. Once the owners of new firms expand their businesses to other cities, it becomes very difficult for them to operate the businesses effectively. Overexpansion creates difficulties for the managers and becomes a hurdle in growth of the business instead of earning more profits for the owners of the firms. Successful entrepreneurs always keep in mind that expanding a business is a good decision for the established firms but expanding too quickly is not always a good decision for the new firms. Ineffective Marketing Planning Ineffective marketing planning is also one of the factors of business failure. Growth of a new business requires effective marketing planning but most of the new firms do not make use of effective advertising methods. Ayodele (2010) asserts, “A go getter business promotion will make a business grow in a rapid way but failure to have a go getter promotion will make the business fail”. Customers are attracted towards a firm only if it creates awareness among the customers regarding the newly launched products and services using effective promotion strategies. Those firms fail to mark success, which do not implement effective marketing strategies required for the growth and development of the business. These were some of the reasons for why a large number of firms fail to grow and develop into established firms. Entrepreneurs, who are able to achieve fast-growth, consider these factors while developing the business strategies for their firms. Start of a new business needs special attention of the owner and the managers and negligence towards any of the above-mentioned factors results in failure of the business. References Ayodele, S. (2010). Top 10 Reasons Why Business Fail!. Retrieved Feb. 04, 2010, from http://www.megabizflakes.com/top-10-reasons-why-business-fail Glenn, S. (2010). Technology & Business Growth. Retrieved Feb. 04, 2010, from http://www.ehow.com/about_6575255_technology-business-growth.html Wallener, D. (2011). What Is An Entrepreneur?. Retrieved Feb. 04, 2010, from http://www.wisegeek.com/what-is-an-entrepreneur.htm Read More