10 minor and 6 major faults
Surname. Hint he was in a band called
Ultravox, and was the key person
behind the original Band Aid
Business failure
• Businesses fail when
• They run out of cash and cannot pay bills (we covered
with liquidity), and so become bankrupt and enter
administration, or
• The profits are not sufficient for the owner to continue
• Ipads – read and discuss textbook 39.1 on Forbes
article on failure. Underlying causes:
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•
•
•
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Not close to customers
Product not differentiated enough
Poor communication of idea
Poor leadership
Wrong business model (not profitable)
Business failure
Why are Manchester United and Chelsea performing
poorly?
• Is the fault internal to the clubs?
• Is the fault someone else’s?
• Internal causes of failure – which lead a business to
enter administration:
• Marketing failure
• Wrong products or services. Could lead to loss of contracts or
demand
• Financial failure
• Often follows marketing failure, but may also be caused by
overtrading (growing too quickly), or poor management of liquidity
Business failure
• External causes:
• Change in technology. iPads – find some examples
• Lots of examples where selling of product moves online (Amazon
started this way with consumers buying books, cds etc from
Amazon rather than from HMV, WH Smith etc)
• Also soft copies of music, books and films (Blockbuster) rather
than physical
• New products – Apple wiped out Nokia with smartphones whist
Nokia (with 40% market share) only had simple phones
• Change in economic conditions
• Slowdown in growth affects luxury companies in particular and
leads to failures (boutiques, holiday companies)
• Change on exchange rate. Stronger pound means companies
making products in the UK and selling overseas lose business
Business failure
• External causes:
• New competitors. iPads – examples of business failure,
or difficulties from new entrants
• Many examples – Amazon is a new competitor to so many, Aldi
and Lidl to supermarkets, and local supermarket stores to
corner shops
• Banks not lending
• After the financial crisis, banks have been both unable and
unwilling to lend, particularly to smaller firms. May be getting
a bit better, but small firms with liquidity problems may not be
able to solve them with bank loans
Business Failure –typical patterns
A small business may close because the owner is not happy about
the size of profits, but mostly businesses fail because either internal
and/or external factors lead it to operate at a loss and eventually to
run out of cash
• If a business operates below break-even, this means cash
outflows will generally exceed outflows
• Eventually it will find itself unable to pay a bill, and unless it can raise
more finance from banks or shareholders, creditors (those it owes
money to) will demand payment, and the firm will move into
administration
• The business will make a loss if:
• For a new firm
• the idea or product is not unique/not profitable
• For existing firms
• if they are unable to adapt to the threat of new products, new competitors or
to a change in the economic environment. This can be a failure of management
• If they grow too quickly (over trade)
• Poor management meaning a demotivated workforce, poor decisions, low
productivity etc