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The 6 Reasons for Business Failure, and How to Address Them

From a lack of customer awareness to loss of execution focus, how failure happens, and why you should never shy away from analyzing it.

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Opinions expressed by Entrepreneur contributors are their own.

In my work with startups and company founders, I have found that the possibility of failure is a constant companion: it's always there, waiting around the corner. However, instead of fearing failure and doing everything we can to avoid it, I've found that a much more effective strategy is to anticipate and prepare for it, do everything we can to establish the reasons for it when it happens, then learn methods of improving.

While there are many ways to fail in business, let's consider some of the most common and what we can do as leaders to transform them into success.

1. Customer failure

After then-Tata Group Chairman Ratan Tata witnessed a family of four crash to the pavement as they rode an overloaded two-wheeled scooter through a slippery intersection in Bengaluru, India, he was moved to create a $2,500 "people's car": the Nano. Tata's vision for this vehicle was to democratize transportation — providing a safe and affordable way for potentially hundreds of millions of people to drive from villages to cities where higher-paying jobs were available.

Ultimately, the Nano was a failure. Only about 300,000 of the cars were sold during its 2008-to-2018 production run, most within the first few years after it was introduced, then sales quickly tailed off. The cause was a failure to fully understand the needs of its customers, and a marketing overemphasis on "cheapest", which is a reliable customer turnoff in this industry.

So, to avoid this brand of customer failure, have a destination in mind, a vision for the destination and the conviction that the journey is worthwhile. But beyond that, you need to know who the customers are for a new product, and that it needs to solve a problem that's sufficiently important to them. Without a customer, you have nothing.

Related: Determining Your Ideal Customer

2. Technology failure

Who can forget the Segway PT stand-up electric scooter, introduced to the world in 2001? It was a marvel of technology, incorporating a groundbreaking network of five gyroscopic and two acceleration sensors with the ability to analyze the environment and the rider's position 100 times per second.

Segway anticipated sales of up to 100,000 units a year starting in 2003. By mid-2006, however, only 23,500 had been sold and the company was acquired by the Chinese electric kick scooter manufacturer Ninebot in 2015.

An enduring lesson here is that it takes more than great technology to make a product successful. There also needs to be an ecosystem to support the adoption of the technology and the support of innovations. What's needed is to take a wider view of the entire innovation realm instead of narrowly focusing on execution. This can be done by focusing on two specific types of risk: co-innovation risk (what else needs to improve for my innovation to matter?) and adoption chain risk (who else needs to adopt my innovation before the end customer can assess the full value proposition?).

3. Product failure

In part using funds generated by sales of records by The Beatles, UK technology company Electric and Musical Industries Ltd. (EMI) first conceived the revolutionary computed tomography (CT) scanner and began selling units in 1972. Demand turned out to be off the charts, growing at more than 100 percent per year, and EMI had all the advantages: it was the first mover, it owned the patents and intellectual property, it had plenty of cash in the bank and it employed the technology's inventor.

Eventually, EMI's first-mover advantage eroded. The same year the company sold its first three scanners (which were limited to imaging human heads), Siemens started its own CT research and development unit, and in 1974 began hospital trials of a CT head-scanning machine. Siemens quickly realized, however, that the next big thing was going to be whole-body scans, and in 1977 it was the first to introduce a CT scanner capable of doing them. Sales for EMI units plunged, and the company exited the medical imaging business entirely in 1980.

EMI's failure was not expanding into the many available product adjacencies it could have tapped for second and third acts. Interestingly, and seemingly ounterintuitively, the first mover may have a higher risk of product failure than a fast follower, which has the opportunity to learn from the first's mistakes. A lack of speed kills, so maximize the pace of translating ideas into action, seeing results and getting feedback, then feeding what you've learned into your hypothesis — making required changes along the way.

Related: 7 Ways to Build Hype Months Before Your Business Launches

4. Timing failure

The Essential Phone, invented by Andy Rubin (founding father of Android), had everything going for it. After leaving Google, Rubin created Playground, a venture fund and startup studio, which he envisioned as a place where remarkable hardware, software, artificial intelligence and design would be merged to create great products. To this end, he attracted $300 million in investment and put together an enviable coalition of partner companies. The result was an innovative smartphone launched in 2017.

According to press reports, only 5,000 Essential Phones were sold through exclusive partner Sprint in its first month, just 88,000 units in the whole of 2017 (after delays, the phone started shipping in August 2017). Compare this with Apple's iPhone, which sold a million units within 74 days of its release. The Essential Phone was too little too late, and its exclusive partnership with Sprint limited visibility in the marketplace.

When introducing a new product, there is a golden window: that optimum period when a product will be adopted quickly. If you're too early, but most will ignore it. If too late, the market will already be overly saturated, and your product won't be sufficiently differentiated to spur people to buy. The key is to identify market transitions and take advantage of them before the competition does.

5. Business model failure

If you live or work in most any large city, you have no doubt seen the proliferation of electric ride-sharing scooters. Bird was the first electric scooter sharing company out of the gate, placing them on Santa Monica streets in September of 2017. After one year, Bird had sold more than 10 million e-scooter rides and was the fastest startup ever to achieve a valuation of $2 billion. However, in 2020, scooter usage dropped significantly (between 60 and 70%) jeopardizing the industry, which by that time included a slew of companies.

It is simply not enough to have a great product, amazing technology and customers whose problems you are going to solve. To succeed, you must also develop and focus on implementing a sustainable business model that will provide you with sufficient revenue and profit to grow your venture. This depends on getting unit economics right — creating profitable transactions for the company that solve a customer problem. As you work to get these economics right, you have three levers to work with: revenue, cost and differentiation. Each must make positive contributions for you to succeed.

Related: Follow the Laws of Business Building to Secure Your Startup's Success

6. Execution failure

Fully 99% of a business's success is based on just one thing: getting execution right. Amazon learned a very important lesson in this when, in 2013, UPS failed to deliver numerous packages in time for Christmas. The latter company was overwhelmed by an unprecedented volume of packages and wasn't prepared for the surge. To ensure that this would never happen again, Amazon set out to build its own in-house delivery system — transforming UPS's execution failure into a stunning example of execution at scale. By 2020, Amazon delivered more than half of its own packages to customers, and it is anticipated that both UPS and FedEx will deliver fewer packages than Amazon within the next few years.

One of my favorite sayings is, "A vision without execution is just hallucination". I believe that, ultimately, just 1% of a business's success is based on getting the things discussed above right: the customer, the technology, the product, the team, the timing and the business model. Fully 99% of success is based on one thing: getting execution right.

Applying lessons for success

So, it's important to get the basics done, including having sound unit economics, building a team with purpose, understanding customers' pain points, getting timing right and executing well. Unfortunately, companies often remain in the failure zone for some time — especially when they have the funds to keep them afloat, but the best find their way out as quickly as they can. So, when failure knocks at the door, and it will, don't shy away: take it on and break through to the other side… to your long-term success.

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