The Global Landscape for Doing Business - Essay Example

Table of Contents Introduction 2 2 Global business condition and failure rate 3 3 Business conditions in the UK 5 4 BUSINESS CLOSURE AND FAILURE INTHE UK 7 5 CONCLUSION 16 6 LIST OF REFERENCES 17 1 Introduction Business in the modern world is growing increasingly competitive with every passing day. Competition has not only raised challenges for businesses to run profitably, but at the same time, it has increased the challenges for survival. Many businesses across the world are unable to overcome these challenges. Evidence of failures is spread across both industries and the globe (Deloitte, 2008). According to recent statistics from the UK, in 2007 around 12,000 companies faced failure in England and Wales. In 2008, the number of business failures rose to 13,500 companies (ACCA Global, 2008). Failure usually follows a similar pattern in both small and large enterprises when faced with financial crisis in the wider economy. With the economic downturn of 2008, the business climate has become much tougher in the UK for new, upcoming firms. Importantly, in addition to the failure of business due to economic factors, there are many other reasons that contribute to this eventuality (Bartelsman, Scarpetta, & Schivardi, 2003). Hence, taking this into account, this paper aims to analyse the trends related to business failure in the UK. A critical assessment of the related factors is only possible with a deeper understanding of the theoretical framework. Furthermore, the paper also seeks to extract deeper insight into the causes that result in the failure of business. The assessment will bring in to the limelight the factors that play a dominant role in leading entrepreneurs towards business closure. Upon assessment of the reasons it identifies, this paper will also discuss the factors that appear to be least convincing for justifying failure. 2 Global business condition and failure rate The global landscape for doing business is increasing dual perspectives for the business. The dual impact can be regarded as the direct impact of globalisation. On one hand, the globalisation has increased the opportunities for business to explore different countries and new markets with limited resources required. Also, globalisation has offered new ways to introduce innovative ideas. Yet with this opportunity, global business simultaneously faces increasing challenges as globalisation has increased competition not only from local competitors but from international rivals as well (Arbaugh and Camp, 2000). The number of business failures gives the clear signal of the downfall of the emerging market. According to one report, the business index goes down from 93.5 to 90.2 in the year 2014. According to D&B (2012), the decline in the index was from 5.8% to as low as 3.5 % in the same year. Despite these reforms being taking place, business failure has not been eliminated. The Global Business Failure report has noted that the conditions which influence business failure differ in various countries of the world (D&B, 2012). The report has noted the major factor of the economic outlook and its impact on the solvency of an organisation. With a two-dimensional matrix and the assessment of countries, the following insolvency position of some states has been identified: (D&B, 2012) Furthermore, in addition to the fact that country-specific economic conditions have a significant impact, the rate of business failure in some sectors has been higher when compared to others. For example, the telecommunications & transportation industries have lower insolvency rate when compared to retail businesses. In addition to this, some sectors demonstrate an improved solvency status in the year 2012 when compared to that of 2011 (D&B, 2012). The reflection of the status of the sector-wide insolvency of different sectors has been as follows: (D&B, 2012) 3 Business conditions in the UK The United Kingdom is recognised among the leading economies of the world; as a member of the Organisation for Economic Co-operation and Development (OECD) and with a population of 63,227,526 and $38,250 per capita, the country is regarded as one of the high income countries (IFC, 2014). According to the statistics, the UK contributes around 2.75% of the total global economy (Quandl, n.d.). This contribution makes it an important country in which to do business. Since the turn of the century, the estimated number of businesses in UK has been as follows: (BIS, 2012) These businesses have been a combination of small, medium and large businesses. The growth trend shows that small business with no employees have witnessed massive growth in the past decade, and 99.9% of the private sector businesses in UK were SMEs as evident from the growth trend chart given below: (BIS, 2012) However, with this consistent growth, the British economy has also witnessed business failure. In the year 2013, almost one in three start-up businesses failed within the first three years (Stout, 2012). Hence, the status of an advanced economy does not mean that the challenge of failure is not also present in the UK. Formulating a potential response or solution to the issues which result in the closure of business requires an in-depth understanding of those same factors. 4 BUSINESS CLOSURE AND FAILURE IN THE UK It is understandable tha the closure of a business is often perceived as a purely negative activity. However, this is not always the case. On the one hand, business failure is considered negative for its economic consequences such as the loss of employment and investment in the economy (Storey and Greene, 2010). On the other hand, it may also have positive consequences, as well. For example, successful closure has reduced the impact of sudden shock to the economy. It can also prove to be an important learning experience for the business owners or other related stakeholders and most importantly, failure acts as a signal to others about the potential factors that can cause it (Cressy, 2008). For example, JJB Store shut down in the year 2012 can be used as an important case study. JJB, once renowned for its position as the UK’s largest sports store, was shut down in 2012 after the failure of long negotiations with its administrators. It gave a shock of around one billion pounds to the UK economy, in addition to the impact of the closure of 133 stores and job losses amounting to 2200 employees. This closure was the result of the failed negotiations and the inability of the company to sell the store to other potential candidates. Despite the harsh consequences of the closure, the company also left some positive lessons for the other entrepreneurs and the other people involved (Kollewe, 2012). Some of the important lessons that can be learnt include analyzing the offerings of the competitors, analyzing the market and behaviour of the consumers, managing the product line according to the market and according to the needs and wants of the consumers. The closure of business therefore, can be said to have a positive and negative impact for others. According to Kollewe (2012), the closure of the businesses often confused within three overlapping concepts.  The first of these is Exit, which may be a voluntary decision or even an involuntary decision. A voluntary decision results in the departure of a business from the market either by closing it down or selling it on to new owners. In making such a decision, entrepreneurs are driven by the fact that they may find that it is more feasible to sell the business or close it down than to continue to conduct the business. For example, in acquisitions the owners of firms that are acquired by the acquiring parties consider it more feasible to sell the firm to the owners of the latter. In many instances, these decisions by the target businesses are taken in view of the fact that such enterprises are small in scale and their resources are unable to meet the competitive pressures posed by the market. Hence, instead of facing the prospect of business failure, such companies accept acquisition bids from larger competitors. Therefore, such uncertainties illustrate the importance of the wealth maximization objective of a business as the backdrop to any exit decision. The other situation that results in closure of a business results from failure. In such a situation, the organization has been left with no option other than to close down as a result of its inability to meet its obligations. This implies that failure fundamentally happens as a result of a lack of financial resources available to the business. Cases of a shutdown despite the willingness of the business owners to continue can be clearly defined as examples of failure of the business. It is important to understand that firms’ failures do not always result in closure; instead, if a big giant company fails in one of its projects then the identified project is ceased and the rest of the business continues to survive. For example, Ford Motor Company launched Edsel in the year 1958. The project was massive failure as it caused the company the loss of around $250 million at the time. Ford introduced Edsel and the objective of the company was to give the market futuristic approach. With Edsel, Ford also wanted to experiment the new the era of car. The car failed to meet the standards of consumers with respect to a futuristic car. This failure of Ford’s project can be more accurately defined in view of the concept put forward by Cressy (2008). This holds the view that the failure of a business can be described as the situation where it is unable to meet the objectives of the company as planned. The third term is related to the closures of the business which simply refers to the business discontinuation. As noted above, the nature and shape of businesses in the UK has changed in its constituting components and small enterprises are increasing in number. These growing businesses are also highly prone to business failures or closure. According to statistics, businesses that have high probability to failure in the UK business market include courier, transport and other delivery related companies (Small Business, 2007). The other category that remains under great pressure includes restaurants and other related businesses of the industry. Importantly, the latter category is subject to a risk of closure as much as three times that of othercategories in the UK business market. The business failure trends in the UK in other industries have been as follows. For example, Small Business (2007) has reported the failure of business in UK: (Inferred from: Small Business, 2007) Also in the UK, many innovative businesses have failed. According to Christensen (2000), Honda had developed a most innovative idea to use the Intel 8088 processor in hydraulic excavators. Although this disruptive technology has developed the competitive market, it failed to reach the expected results. This shows that it is very important to understand the competitors approach to lead in the latest technological businesses. It is better to identify the threats over time, and to produce a less costly product in the market. The UK is a highly competitive market, and it requires a strong, innovative, low cost and competitive approach to grow a business in such a market (Wray, 2012). Hence, one of the patterns in the closure of businesses that has been identified is the closure of firms related to certain industries at a higher rate than when compared to other industries. Storey and Greene (2010) has also ascertained the fact of the closure of the small business. When examining the results below, the pattern that is identified in ‘Deaths’ by employee size category puts forward the claim that small firms with a limited number of employees have more potential to close down when compared to those businesses with a higher number of employees: (Storey and Greene, 2010) Hence, closure of business has considerable implications. The closure of businesses also incurs a certain cost which is in addition to the cost implied above. Small firms do not have sufficient capital and funds to manage and go through large shocks. Thus, when such situations arise small firms may get close. On the other hand, large firms such as Ford will have the capacity and capital to bear losses for some time and still survive and flourish. In a report, the CBI (2011) mentions that in the UK during 2002-09, medium sized business had a higher growth rate when compared to small business, while collectively their combined growth rate was lower than that of large business. This is also evident in the fact that small scale businesses increase their growth potential as and when they manage to survive the initial period of operations that poses the greatest challenges to success. Hence, another pattern is identified, namely that businesses face a high probability of failure and closure in their initial period of operation. This makes it important to analyze the reasons that cause the closures of small firms as well as failures. Furthermore, this also requires businesses to explore the reasons that bear the highest responsibility for other business failures or closures. In order to reduce these closures, academics and practitioners have most prominently focused on two dimensions. The first area of interest is to determine the approach that is able to measure the closure rate of the business. Some of the indicators used in the UK to measure the closure of a business include the closure of commercial bank accounts, filing for bankruptcy, deregistration from VAT, the closure of company accounts, and reporting the liquidation of the company. The performance of the five dimensions in measuring the closure of the company has been reported in the image below: Some recent studies have also attempted to explore other, more simple measures. For instance, Carter, Williams, and Reynolds (1997) finds that small enterprises that are run by females are more likely to face closure status when compared with their counterparts run by men. The above image presents information related to the closure of business. However, there are several other issues and challenges that lead to the failure of the business. Thus only stating or calculating the ratio of total population to closure of business may not be appropriate. Therefore, it can be said that there are several other factors and issues that also impact the closure of the business. For example, each business has its own defining dimensions. These idiosyncratic differences in each business makes it difficult to compare the business types. Also the differences in the reasons that result in the ultimate closure make it a challenge to determine whether the business closure can be classified as a failure, closure or an exit. In order to control the failure and closure rates, it is critical to understand the factor that directly and indirectly leads to the closure of a business. Stokes & Blackburn (2002), in a study, have referred to the different studies in this context. One of the reported reasons includes the closures of the business due to its functions. Ill performed functions of a business often result in closures as these go beyond the control of the owners of the small businesses, as small businesses are run by a limited number of people; therefore, such businesses are highly influenced by the personal character of their owner or the individual controlling the business. Environmental conditions have greater impact on these businesses, for example, the limitations of financial and other resources etc. In the context of the UK, the CBI has developed a comprehensive report on the identification of the aspects that can raise the role of small and medium size enterprises in the UK: (CBI, 2011) These factors, as pointed out by medium sized business players in UK, are closely aligned with three factors identified by the Cressy (2008) which refer to the importance of the initial capital to the business. Cressy further states that initial capital also enables the entrepreneurs to overcome the risks that are posed to the business as well as increases its strength to sustain growth for a longer period of time. Hence, a resource based approach to business closure a powerful dilemma for small entrepreneurs. According to CBI (2011), medium size entrepreneurs or small scale business does not look for the safety measures which in turn results in the closure of the business either by exit or failure or simple closure. Another reason that causes the failure or the closure of the innovative ideas in UK is the fact that government does not support these firms with a comprehensive strategy to overcome such challenges and to grow accordingly (Miller, 2013). The lack of government support also resulted in the failure of the UK to gain any position in the global top 100 innovative ideas ranking (Bennett, 2013). This is an important factor when thinking about the sustenance of small scale enterprise. Importantly, as the government does not give due attention to businesses, the resulting environment becomes more challenging for such enterprises. For example, lack of government support reduces the attention of banks towards financing the business. Consequently, this affects the ability of businesses to generate capital as and when required. This in turn makes running a business a gambler’s ruin where they must run on chance and shut down when challenges go beyond their ability to sustain (Birley & Niktari, 1996; Richardson, Nwankwo, & Richardson, 1994). Another approach towards business closure is the ecology of population. The increased level of competition for resources consequentially leads larger firms to win resources on the basis of their capacity and ability, while smaller firms fall behind due to their limited ability to compete. It is a fact that these factors have an impact; however, the statistics at the ground level also demonstrate the importance of other factors. As noted in the CBI report, different businesses of medium size tend not to apply for patents despite the fact that the innovations emerging from these businesses are eligible. The behavior of these companies, by not competing for resources, is the major reason for failure. This is also ascertained from the fact that giants like Apple and Google also evolved from a similar environment and their success shall be attributed to their drive to compete for resources. Another approach is that of personal learning. This is similar to the imperative that was discussed at the start of the essay, as one positive aspect of business closure is that it provides lessons of good and bad practice not just to the closing business but also to others. 5 CONCLUSION In conclusion, each aspect and factor has its own dimensions and impact that may drive business towards closure. The role of government support is regarded as the most important, for the fact that many links of the commercial chain are dependent on it. However, the decision making approach is assumed to be least convincing. This is because in the contemporary, highly competitive business world, without effective and efficient decision making ability no business can survive, irrespective of its size. For this reason, failure rate in the UK can be controlled by giving due attention to the small and medium size businesses as a force that constitutes a greater section of the businesses in the UK. 6 LIST OF REFERENCES Arbaugh, J B and Camp, S M (2000). Managing Growth Transitions: Theoretical Perspectives and Research Directions Chapter 15 in D. L Sexton and H. Landstrom (eds) The Blackwell Handbook of Entrepreneurship. Oxford: Blackwell, pp. 308-328 Bartelsman, E. J., Scarpetta, S., & Schivardi, F. (2003). Comparative analysis of firm demographics and survival: micro-level evidence for the OECD countries. OECD. Bennett, A. (2013). Top 100 global innovators fails to include any UK businesses. 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Boston: Harvard Business Review Press Cressy, R (2008). Determinants of small firm survival and growth Chapter 7 in M. Casson, B Yeung, a.Basu and N. Wadeson (eds). The Oxford Handbook of Entrepreneurship. Oxford: OUP, pp. 161-193 D&B. (2012). Global business failures report. Available from http://www.dnbcountryrisk.com/FreeSamples/ICI/ICI_06.12.pdf [Accessed 12 May 2014] Deloitte. (2008). Mastering Innovation: Exploiting Ideas for Profitable Growth. London: Deloitte Kollewe, J. (2012). JJB goes into administration – with 133 shop closures and 2,200 job losses. Available from http://www.theguardian.com/business/2012/oct/01/jjb-administration-shop-closures-job-losses [Accessed 28 May 2014] Miller, A. (2013). UK entrepreneurs being failed by lack of Government support. Available from http://www.parliament.uk/business/committees/committees-a-z/commons-select/science-and-technology-committee/news/130313-valley-report-published/ [Accessed 28 May 2014] Quandl. (n.d.). GDP as Share of World GDP at PPP By Country. Available from http://www.quandl.com/economics/gdp-as-share-of-world-gdp-at-ppp-by-country [Accessed 12 May 2014] Richardson, B., Nwankwo, S., & Richardson, S. (1994). Understanding the causes of business failure crises: generic failure types: boiled frogs, drowned frogs, bullfrogs and tadpoles. Management Decision, vol. 32, no. 4, pp. 9-22. Small Business. (2007). Failure rates in UK businesses. Available from http://www.smallbusiness.co.uk/news/outlook/254967/failure-rates-for-uk-business.thtml [Accessed 12 May 2014] Stokes, D., & Blackburn, R. (2002). Learning the hard way: the lessons of owner-managers who have closed their businesses. Journal of Small Business and Enterprise Development, vol. 9, no. 1, pp. 17-27. Storey, DJ and Greene, FJ. (2010). Small Business and Entrepreneurship. Pearson Education  Stout, A. (2012). The UK startup economy in numbers: Nov 2012. Available from http://www.insidestartups.co.uk/blog/the-uk-startup-economy-in-numbers-nov-2012/ [Accessed 12 May 2014] Wray, F. (2012). Rethinking the venture capital industry: relational geographies and impacts of venture capitalists in two UK regions. Journal of Economic Geography, vol. 12, no. 1, pp. 297-319. Read More