Over the next few months, we will share with you some of the lessons learned by the IDC regarding the causes of business failures. These lessons fall into four key categories which are marketing, technical, financial and management related. In this article, our focus is on those failures which are related to the marketing activities of the business.
Common causes of business failures - a marketing perspective
Marketing lessons learned from business
Pricing Strategy not in line with the costs structure of the business
Some companies fail to make a significant breakthrough into the market with their existing products and, therefore, decide to reduce their prices in an attempt to capture market share. They fail to realise that the new pricing structure cannot support all their variable and fixed costs. These businesses fail as a change in pricing policy in respect of a single marketing factor has a ripple effect upon the other operational variables. Consequently, a policy change in respect of any single factor must always be accompanied by a review of the whole business strategy. This may include staffing, salaries, raw material sources and costs, lease agreements, distribution, promotion, efficiencies, and any other expenses and operational activities.
Reliance on export market
Some companies are unable to hedge against the risk of fluctuating exchange rates, changes affecting their overseas clients who are always looking for cheaper global prices, and business relationship changes due to mergers and acquisitions. For example, one particular company was supplying 80% of the products it manufactured to a chain store in the UK, its main customer. The strengthening of the Rand had a very negative impact on the profit margins of the business. The situation was exacerbated when the chain store was subsequently sold to another investor, resulting in a decline in orders. The company attempted to grow its clientele locally, but did not succeed since it was difficult to replace 80% of turnover within a reasonable space of time. This business ultimately failed due to its dependency on exports to one customer for over 80% of its turnover and when the Rand strengthened against the major currencies, turnover was adversely affected. As a means of mitigating against such a situation, taking forward cover could have assisted in some way, although at the time the majority view was that the Rand would continue to weaken. The strengthening of the Rand has demonstrated that focusing only on the export market exposes the company to major risk.
Under estimation of dominant competitors
Some businesses try to enter established markets where there are entrenched competitors, but without the necessary differentiating and competitive factors. For example, two key problems have plagued one such company since its inception. The company was unable to significantly penetrate the mining support market, firstly because of the dominance of established competitors and secondly, because of the long testing and acceptance procedures prevalent in the mining sector. The company focused all its effort on penetrating the primary mining support market with a product which was not unique. The result was that they could not get prospective clients to switch from existing suppliers. The lesson learned is that it is important to undertake a proper competitor analysis and product differentiation study when entering such mature markets. If there is no competitive advantage and the product offering already exists from other companies, the business challenge to penetrate the mature market is significant.
Fatal flaws in vital contracts
Some companies undertake contracts without properly understanding the contents and details of those contracts and without taking insurance or other hedging instruments against any possible risk. The risk becomes high especially when the company relies for most of its income on the contract. For example, one company was awarded a contract that they thought would make them substantial profits. Based on representations from the contractor, the company acquired expensive equipment and materials and employed a significant number of staff to service the contract. The company did not get the promised level of business from the contractor and could not generate the necessary income. The company became cash strapped and could not meet its obligations. The problem with the contract was that it did not include penalty clauses in the case of the contractor failing to take the contracted volumes of the product. Although the contractor had good intentions, unforeseen market changes occurred, resulting in it being unable to take the contracted volumes. However, the contractor was not at risk since he had outsourced manufacturing and did not have high debt as the supplier. This company should have taken out the necessary insurance, demanded a more stringent contract, or sought more clients for the new equipment.
To be continued in the next issue...
