KUALA LUMPUR, Jan 28 — Entrepreneurs are a breed of determined, bold, and competitive human beings. Most often than not, they have the personal qualities they need to run a successful business.
Then why is it that an astonishing eight out of 10 small businesses fail every year? By examining pitfalls in businesses that are doing everything “right,” it becomes easier to see how it takes more than an ambitious CEO to achieve success.
Many countries have accepted the fact that small and medium enterprises (SMEs) are the building blocks of their economies. The SMEs in Malaysia, which constitute 99.3 per cent of all businesses in the country, are a vital component and contribute significantly to the nation’s economy.
Even though the sector is an important component, many of these SMEs cannot sustain themselves over the long term and face problems and failures in their survival within the first five years. Some say that these failures arise because they do not practise any form of strategic planning while others come up with an array of reasons as to why small businesses fail.
The SMEs face many challenges in the current globalised environment. Amongst the many reasons for small business failure are lack of access to finance, human resource limitations, limited or no ability to adopt technology, lack of essential awareness on potential markets and customers, and global competition.
In addition, many small businesses would be wiped out if they do not increase their competitiveness in the new, rapidly changing world of globalisation.
Common failure factors of small businesses
Leadership failure: Many businesses fail due to poor management skills, which can be evident in many forms. The CEO can struggle as a leader if he/she doesn’t have what it takes to make management decisions, supervise staff, or the vision to lead their organisation. When problems requiring strong leadership occur, the employees may be reluctant to take charge and resolve the issues while the business continues to slip toward failure. Dysfunctional leadership will trickle down and affect every aspect of the organisation’s operations, from financial management to employee morale, and once productivity is hindered, failure looms large on the horizon. Hence, doing whatever needs to be done to enhance leadership skills and knowledge of the industry will be vital to the long-term success of any business. As such, strong leadership can be the most important factor that can make or break an organisation and this is common to any organisation striving to achieve its goals and objectives.
Lack of strategic planning: Strategic planning is a process that provides direction for the improvement of business activities of organisations. It helps to formulate business strategy which when implemented tends to increase business performance in an organisation. Strategic planning is extremely important for the success of an organisation. Studies have also shown that the high failure rate among small firms, particularly among start-ups, can be attributed to the lack of strategic business planning. The unsuccessful consumption of strategic planning is the major barrier to achieve expected or estimated performance. Thus, strategic planning is extremely important to the development of a resilient SME sector. Many of the factors discussed below can also be addressed during good strategic planning.
Failing to effectively market online: In an age where “Google” is a verb, if small businesses are not marketing online, they would not be selling as much as they could be. Studies have shown that 80 per cent of Internet users have used the Internet to make a purchase. Furthermore, 81 per cent of Internet users research products online before making a purchase. In order for any business to thrive, it must be visible to consumers doing their online research and shopping. Search Engine Optimisation (SEO), social media marketing, and cross-selling between all communication channels are all absolutely crucial to increasing online visibility. Press exposure, press releases, traditional PR, social media, and print marketing should indicate strong online presence. Many businesses now incorporate QR codes and social media icons into their print ads because an increasing number of people will look up their business online. In addition to the above, tracking and measuring a business’ marketing efforts is of the utmost importance. Web analytic tools can provide valuable market research and insight. Web analytics can be used to see which activities generate traffic to the business, what the customer wants to know, customer demographics and which customers are leaving your site without purchasing. Being able to measure online business in action could help to improve user experience, discover trends among customers, and boost the bottom line.
Failing to listen to the core customers: A business will fail if it neglects to stay in touch with its customers and understand what they need and the feedback they offer. The customers may like a product or service but they would love it if you changed some feature or altered that process. 78 per cent of consumers will listen to the input of other consumers online more than any other source. Whether or not a business’ primary marketing efforts are online or offline, it is extremely important to provide customers with an easy and immediate way to interact with the business online. They can give feedback about products, pricing, and business practices. In turn, the business can give them real-time response in the form of online chats that can turn into an ongoing relationship. A business’ quick and helpful response to its customers’ feedback and reviews will impress both its current customers and potential customers who are looking into online reviews to determine if they want to use a product or service.
Poor financial management: It has been shown that 30 per cent of small businesses fail due to poor financial management. A business owner must know, down to the last ringgit, where the money in the business is coming from and where it’s going in order for the business to succeed. Failure of the business can also occur if it lacks a contingency funding plan, a reserve of money to call upon in the event of a financial crisis. Some small business owners don’t have the skill or interest to manage cash flow, taxes, expenses, and other financial issues. Poor accounting practice puts a business on a path straight to failure.
Starting a business is an exciting endeavour that requires a clearly defined product or service and a strong market demand for it. Regardless of whether a company is a start-up or already in business, success depends on strong leadership, careful strategic planning, effective marketing, listening to the customer and sound fiscal management. This begins prior to start-up and continues throughout the life of the business.
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** Dr Viraj Perera is the CEO of PlaTCOM Ventures Sdn Bhd, the national technology commercialisation platform of Malaysia which is a wholly-owned subsidiary of Agensi Inovasi Malaysia (AIM) formed in collabouration with SME Corp Malaysia.