EIA 013 Five Reasons a Business Fails
Thomas Koenig discusses his five reasons why businesses fail. He also gives us the reasons why he believes that entrepreneurs are the future for jobs, the importance of creating a business plan that contains a business model in order to be successful, the three approaches that an entrepreneur can call upon to compete in the market place, unique product or service, price and customer service, the approach he would take to creating a business based on the advantages and disadvantages of each and why he thinks customer service is the logical road to business success. Thomas finally ended with the advice that research and testing were just as important for an entrepreneurs success.
Thomas is on one of his regular visits to Asia. We met the day before at an entrepreneurs.asia meetup group in Shanghai. The focus of the discussion was the topic that he covered during that presentation “The Top 5 Reasons New Businesses Fail”
Thomas starts off our conversation by telling me that he is from California and that he is currently in Shanghai for some business as well as taking part in a entrepreneurs.asia meetup. His background in Asia starts 1980 when he first came to China in a sales role for America Express. He retired 15 years ago and has since been working in corporate training business continuing to visit China as well as Europe.
Thomas believes that entrepreneurs are the future, that jobs are created by entrepreneurs and startups, and that the goals are in their hands right now. They will create the jobs and wealth as we move forward especially in countries like China, also in areas of Africa, as well as Indonesian, Thailand. It is the only thing we have going for us as far as jobs are concerned. He asks us to remember that government owned enterprises don’t create jobs due to their inefficiencies and that they get rid of jobs. Entrepreneurs are the efficient ones in the market that will create jobs and profits.
When an entrepreneur thinks about going into business he or she has probably heard a dozen times, is to first write a professional business plan, get something down on paper. It makes sense in since if the business needs money a venture capitalist is not going to talk to you if you don’t have one. If you haven’t done one before a quick search on the Internet will bring up dozens and dozens and you can choose one to use as a model, and you will be fine.
Competing with a unique product or service: If an entrepreneur has a unique product or service then he or she is in the driving seat. You can do whatever you want do, charge whatever you want and not worry about the competition. However if you are a small guy and you have a patent don’t think that you are safe because the big guys will duplicate your product within weeks if they know it’s successful. You could be spending the next fifteen years defending your patent, and since your pockets are not that deep and theirs are, the chances are that they are going to win. A win could also be an approach after many years to buy you out if you choose to defend your patent. This could be fine if you have a good enough patent you could get rich that way, and is seen all the time with the likes of Facebook, Apple and Samsung. They can wait a few years, take you to court, take away your money and then buy you out. Remember that it is the entrepreneurs that create the innovations and not the big guys. In the beginning these companies were themselves innovative but as they have become bigger innovation ends and that it is the small guys starting a new business that drive innovation. An example of this are apps that are created by small guys working out of a garage that make money. Think of a new app, then they sell it. If the app is great then one of the big companies will duplicate it and then they will be fighting it out.
Reason 1, Competing on price: If you are going to be the low price guy, in other words compete on price alone then eventually you will go broke. The simple reason is that you took the business from someone based on your low price so someone else will take away your business because of low pricing. When you start off your overheads are nothing. You are working out of your apartment, no employees, no benefits for employees, probably no taxes, no insurance, so you can keep your overheads down. But once you become successful and you get a nice account. Eventually you have to move out and start paying rent, hiring employees, paying benefits and your costs go up. But just like were there is also a guy sitting in his garage right now doing what you did and preparing to take the account that you did from the last guy. You do not want to get into a pricing war it is always a loosing battle.
Customer Service This is the solution “customer service”. The selling experience must be so great that price is not the big issue. people want to do business with you. They enjoy the camaraderie, location, warranty, guarantee. That is basically customer service.
A person want to shop with someone where they know that if the product is bad they can get a refund, it can be repaired , replaced without hassles. That is customer is service. Competing on customer service means that once you have a loyal customer you have that customer for ever.
It is important to have the customer service right from the start, even as a startup. All businesses want customers and once you get them you want to keep them. There is an old saying it is 20 times the cost to get a new customer than to retain a customer. You never want to loose a customer. To keep them you must talk to them and stay close because your competitor is waiting to take them.
The Business is Up and Running. Once you have got your business up and running based on your business plan and you have customers and your providing customer service you need to hire the best accountant you can. Businesses fail because they run out of money and there are many reasons to run out of money. Hiring a good CPA is critical to the business.
Reason 2, The Business doesn’t communicate with their customers: It is probably the number one reason why a business fails. Customers will tell you how good you are, how you are doing, how poorly you are doing, the types of product and services they need. All business are basically market driven that is they go to where the market takes them and the customer will tell you where they are going.
Additionally, Differentiation: if a business cannot differentiate from its competitor a customer will only come to you first on location and the second based on price and if the only factor is price then you will fail.
Example of Competing on price are Convenience stores. They are very similar in that they sell milk, Coca-Cola and bread: all for the same price. If you’er an individual and you take out a franchise it is possible to make money, but you need to determine what separates you from the other convenience stores. The only obvious differentiation is location since products and prices are the same. The success of retail is dependant on foot traffic. This is what counts. If you have ten thousand people walking past your store you will do better than one thousand people walking past your store. Look at the major shopping centre as you move up from the lower floors to the higher floors. The foot traffic becomes less. More money is made on the lower floors but the rents decrease on the higher floors along with the sales. It is always foot traffic.
As a business you have to think how can I differentiate from the competitors. If you cannot differentiate then you have a major problem that will cause you trouble. You need to ask yourself why did you go into that business in the first place. To survive you have got to sit down and think of a difference. If you can’t you are back into competing on price, which is a loser.
Reason 3, Failure to communicate the valuation proposition: Communicating this should be done in a clear concise way. Some people have a great story but they simply don’t know how to tell it or they tell it in an inappropriate way. That is why it has to be a clear message.
Clear: My business does this, this and this.
Concise: Use as few words as possible to get the message.
Compelling: There has to be a reason for me to come and do business with you.
These three elements must be communicated.
Reason 4, Leadership Breakdown from The Top: On day one the entrepreneur is the founder and alone. With success; Later may find a cofounder, and/or start to recruit. You are now the leader. Leaders are made not born. The greatest example is in the military. You start off as a private and if you follow the leadership training. You can rise up through the ranks. It is hard to explain what a leader is. The company CEO must always be a leader and not a manager. A leader recruits a manager. A manager never recruits a leader.
A great leader has to have four skills as far as employees go:
Has to be a great recruiter. And is always recruiting, 24-hours a day. Don’t wait for a position to be open before you think about recruiting. For example in an airport when you meet someone and take a business card and write on it the potential of this person to become a partner or an employee at sometime in the future.
Has to be a great trainer. Since people can only do a job if they are trained well.
Has to be a great motivator. Most people don’t work to full capacity. :You are lucky if you get 20 to 30%, which is normal. People only give 100% when their life is at risk. You have a choice to motivate positively or negatively. There are many books out there on motivation but it is important to remember that negative motivation, threats, will give short-term results and positive motivation, reward, will give longer term results.
Focus on the business/company/boss’s goal. An employee’s goal may not necessarily match up. Most people will start with an easy task first and then move onto harder tasks. Fewer will choose the opposite and start with the hardest. The job of the leader is to keep the focus on the tough tasks. It is difficult to find someone that will take on the more challenging activities first. You can find or sense from the resume only good things The former employer may give an idea but you can’t be sure of the work relationship. How good an employee will be in the future is unknown. Once they start to work for you within a short time, a few months, you will then find out if this person is or will be a good employee. If not then make the cut. This is more important for entrepreneurs since they have a lot less money than big companies and so must take action faster.
Rewards and Compensation. An employee going to work for a small company or startup. Must make a choice. Get a salary or warrants, stock options and low pay. This is a gamble. In reverse the entrepreneur in order to get good people must make the same choice. An example of this is Mark Zuckerberg who gave away billions of dollars. If he had the choice to pay salaries he probably would have. However he had no money in the beginning. There are two ways to raise money one is to borrow and the other is to sell something.
Reason 5, Inability to determine a profitable business model: Companies can fail because they don’t know how they generate revenue. What is the business model. The business plan must include in detail the business model, how you are going to make money, which includes everything from buying inventory to how you pay taxes
If the model doesn’t work, then admit to yourself that it has failed and fail fast, and then go and do something else.
If you were starting today? “Coming to China in 1980 as a sales manager to create a banking relationship. Shanghai was not the city it is today but I saw the potential. If I was smart gambler I would have quit my job and moved to China. If I had known I would be a multibillionaire now. I wasn’t a stupid gambler I was making good money in my position, but if I had known. Not the type of gambler that goes to Las Vegas and puts everything on red but a risk taker.” His wife has owned a number of successful businesses and is also a risk taker. If he has been dealt a full house he would put everything on it.
China still has decades of growth left, and should also consider Brazil, which has more problems, and also Africa, which has a rising middle class that needs everything from automobiles to toothbrushes. Africa is more risky, due to civil wars, which you don’t have in China, Vietnam, India. Pakistan is a bit flaky.
General Advice to Entrepreneurs just starting out:
An entrepreneur about to start a business should do intensive research. Going into business is a risk. Don’t risk your money unless you have a great business model. Discuss your model with as many people as you can, from as may backgrounds, barber, brothers, relatives, explain the details. Don’t worry about anyone stealing your idea. If there are any flaws then hopefully one of them will tell you where the flaws are. You don’t want to loose your money by starting a business without being prudent. Test, test, test that would be my advice
An example is Zappos, which had no inventory and sold shoes taking a loss in order to test the business model.
You are very lucky if your business plan works for 18 months. Typically within weeks you find out if there is something wrong. If it is minor you can correct it and keep going but if it is major problem and it is a bad business plan and a bad business model then cut your losses and say goodbye. It is as simple as that.
Thomas Koenig can be contacted at www.koeniggroup.net