The single most potent reason businesses fail
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- Category: SME toolkit
- Written by Bridget Olotu
- Hits: 780
I got this interesting mail from a reader and it hints at the issue I want to address this New Year.
“Your weekly contributions … have been a wake-up call for me. Thank you Madam. I am a Pharmacist working in a Federal hospital. I have always wanted to open a community pharmacy shop that is ICT compliant and driven, to meet the medical needs of our people, as never seen before. I procrastinate a lot; it seems I do not know where and how to start. Any advice from you is worth a million to me.” A. O.
This was my reply to him:
“Hello Mr. A. O. I thank you for your compliments and humility to admit that you needed to take bold steps towards your dream but have been hampered by procrastination. One advice I will readily give you is this: to start any form of business, you need information so you don’t increase the casualty rate of failed businesses. As an employee at the moment, you are venturing into the world of business and need to be armed with the information to avoid making a shipwreck of your foray into business. I am not surprised that the whole thing is mystifying.... It will remain as such until you speak with a Business and Management Consultant who can help you birth your dream…”
The Statistics from the Small Business Association in the US and Canada also confirm the scary outcome of failed businesses. These statistics say that 95% of start-up businesses die 5 years after they have been established, while another 90% of the remaining businesses also die after another 5 years. In real terms, this means that if 1,000 businesses start today, from the analysis they gave, after 5 years, 950 businesses would have gone under, and 5 years later, out of the 50 businesses remaining, another set of 45 businesses would suffer similar fate. This means that after 10 years, only 5 businesses would remain standing out of the 1,000 businesses that started out altogether. This is really no mean threat but a real fact as we all are witnesses of the rising mortality rate of big and as well as small businesses.
But from my experience as a management and business development consultant, businesses whose owners did some form of market survey, feasibility survey, environmental scanning, business planning, etc, tend to survive the booby traps that ensnare many start-ups in the marketplace. For instance, in 2007, we were given a brief by a client to carry out a market survey for him regarding the right location for siting his microfinance bank. We were looking at either Lagos or Abuja. Our representative immediately left for Abuja for the survey there. Already we had prepared a questionnaire which was to be administered in the two locations. After having worked tirelessly for days in Abuja and Lagos, we came up with relevant facts that we shared with our client and which informed our conclusion in the research.
From all indications, our client wanted the bank in Abuja because he is of Northern extraction. There is nothing bad about investing in one’s homeland or community. However, the brief we were given was to look at the viability and profitability of having an MFB in Abuja or Lagos.
Our criteria for selecting the right location for his microfinance bank business were as follows:
1. The right location must be close to the target market.
2. The right location must be close to a large human population
3. The right location must not be too expensive in terms of capital outlay
4. The right location must address the needs of the right market
5. The right location must make it easy for access to a pool of professionals who will work for the bank
6. The right location must provide healthy return on investment (ROI) for the business.
We discovered that Asokoro and Maitama in Abuja (preferred locations of our client) did not meet any of these criteria. This is because Microfinance Bank business as you know is a “mass market” business. It is not to serve the interests of the elite; it is designed to meet the needs of micro fund users and micro-credit needs of the poor, micro and small businesses and low income groups. This is the spirit of the microfinance initiative.
Abuja is a modern city with all the trappings and appellations of elitism, modernity, upper class and highbrow neighbourhoods. Locating an MFB in this city comes with an expensive capital outlay, is not close to the target market as more than 60% of the workers in the FCT, from our findings, live outside the city in places like Yanyan Maraba in Karo LGA, Masaka, etc. Even the residents in the estates within the city are not the target market or right market for microfinance services. They are the elite and do not need microlending and microfinance services. Furthermore, getting workers that would run the bank would also be a Herculean and an expensive task as most of the professionals drive into the city every morning to work and leave in the evening for their homes. We concluded that if our client was to site his bank in Abuja, it would have to be based on the following reasons: (1) establish the head office in Abuja and have cash centres around the markets and suburbs, especially in Masaka and Maraba, and few other places within the city, etc, where the target market is; (2) establish the bank as a social or political project.
On the other hand, our research in Lagos favoured some areas in the city as meeting the criteria we had set for choosing the right location. At the end of the research, our client was saved the pain, stress and economic losses this kind of investment in the wrong location could have brought on him. He then began to look at how to start an MFB in Lagos. If not for this market survey/feasibility study, our client could have probably lost the N50 million he had wanted to invest in the project. By spending about 1% of that amount on the market survey and business plan we later prepared for him, we saved him from losing his capital to bad business decision and furnished him with adequate information on how to successful and profitably operate his microfinance business.
What does this teach SMEs? Don’t start a new business, launch a new product/service, change into a new line of business without carrying out a market survey or doing your due diligence regarding the said business or product. This is because whatever product you are going into will not be consumed by you or by the members of your family. So it is important you look at what the market needs, how the market sees or will see this product/service, examine the capital outlay for the product and the expected income, examine how long it would take for you to recoup your investment or break even, examine the challenges and threats your new product will face in its desired location, look at what the competition is doing, and what the reaction of your competitors will be and the impact of this reaction on the success or otherwise of your product, etc. This is why we encourage start-ups to get a business plan before launching their businesses. No matter how small the effort is, getting adequate information regarding your business, your target market, your marketing strategy, business structure, investment dynamics and other imperatives will make your foray into business a success while helping you escape business failure in the marketplace.
Business is both an art and a science. The art aspect of business deals with how the human elements are successfully fused in a marriage of common goal and destiny, while the science aspect means that you can actually research, observe, gather facts and analyse same to arrive at an objective conclusion regarding the business or develop some predictability in your results or outcomes. Businesses therefore fail because of the lack of or inadequate information and due diligence carried out before the launch and during the life of such enterprises.
Articles
The single most potent reason businesses fail
Category: SME toolkit Written by Bridget Olotu Hits: 780
I got this interesting mail from a reader and it hints at the issue I want to address this New Year.
“Your weekly contributions … have been a wake-up call for me. Thank you Madam. I am a Pharmacist working in a Federal hospital. I have always wanted to open a community pharmacy shop that is ICT compliant and driven, to meet the medical needs of our people, as never seen before. I procrastinate a lot; it seems I do not know where and how to start. Any advice from you is worth a million to me.” A. O.
This was my reply to him:
“Hello Mr. A. O. I thank you for your compliments and humility to admit that you needed to take bold steps towards your dream but have been hampered by procrastination. One advice I will readily give you is this: to start any form of business, you need information so you don’t increase the casualty rate of failed businesses. As an employee at the moment, you are venturing into the world of business and need to be armed with the information to avoid making a shipwreck of your foray into business. I am not surprised that the whole thing is mystifying.... It will remain as such until you speak with a Business and Management Consultant who can help you birth your dream…”
The Statistics from the Small Business Association in the US and Canada also confirm the scary outcome of failed businesses. These statistics say that 95% of start-up businesses die 5 years after they have been established, while another 90% of the remaining businesses also die after another 5 years. In real terms, this means that if 1,000 businesses start today, from the analysis they gave, after 5 years, 950 businesses would have gone under, and 5 years later, out of the 50 businesses remaining, another set of 45 businesses would suffer similar fate. This means that after 10 years, only 5 businesses would remain standing out of the 1,000 businesses that started out altogether. This is really no mean threat but a real fact as we all are witnesses of the rising mortality rate of big and as well as small businesses.
But from my experience as a management and business development consultant, businesses whose owners did some form of market survey, feasibility survey, environmental scanning, business planning, etc, tend to survive the booby traps that ensnare many start-ups in the marketplace. For instance, in 2007, we were given a brief by a client to carry out a market survey for him regarding the right location for siting his microfinance bank. We were looking at either Lagos or Abuja. Our representative immediately left for Abuja for the survey there. Already we had prepared a questionnaire which was to be administered in the two locations. After having worked tirelessly for days in Abuja and Lagos, we came up with relevant facts that we shared with our client and which informed our conclusion in the research.
From all indications, our client wanted the bank in Abuja because he is of Northern extraction. There is nothing bad about investing in one’s homeland or community. However, the brief we were given was to look at the viability and profitability of having an MFB in Abuja or Lagos.
Our criteria for selecting the right location for his microfinance bank business were as follows:
1. The right location must be close to the target market.
2. The right location must be close to a large human population
3. The right location must not be too expensive in terms of capital outlay
4. The right location must address the needs of the right market
5. The right location must make it easy for access to a pool of professionals who will work for the bank
6. The right location must provide healthy return on investment (ROI) for the business.
We discovered that Asokoro and Maitama in Abuja (preferred locations of our client) did not meet any of these criteria. This is because Microfinance Bank business as you know is a “mass market” business. It is not to serve the interests of the elite; it is designed to meet the needs of micro fund users and micro-credit needs of the poor, micro and small businesses and low income groups. This is the spirit of the microfinance initiative.
Abuja is a modern city with all the trappings and appellations of elitism, modernity, upper class and highbrow neighbourhoods. Locating an MFB in this city comes with an expensive capital outlay, is not close to the target market as more than 60% of the workers in the FCT, from our findings, live outside the city in places like Yanyan Maraba in Karo LGA, Masaka, etc. Even the residents in the estates within the city are not the target market or right market for microfinance services. They are the elite and do not need microlending and microfinance services. Furthermore, getting workers that would run the bank would also be a Herculean and an expensive task as most of the professionals drive into the city every morning to work and leave in the evening for their homes. We concluded that if our client was to site his bank in Abuja, it would have to be based on the following reasons: (1) establish the head office in Abuja and have cash centres around the markets and suburbs, especially in Masaka and Maraba, and few other places within the city, etc, where the target market is; (2) establish the bank as a social or political project.
On the other hand, our research in Lagos favoured some areas in the city as meeting the criteria we had set for choosing the right location. At the end of the research, our client was saved the pain, stress and economic losses this kind of investment in the wrong location could have brought on him. He then began to look at how to start an MFB in Lagos. If not for this market survey/feasibility study, our client could have probably lost the N50 million he had wanted to invest in the project. By spending about 1% of that amount on the market survey and business plan we later prepared for him, we saved him from losing his capital to bad business decision and furnished him with adequate information on how to successful and profitably operate his microfinance business.
What does this teach SMEs? Don’t start a new business, launch a new product/service, change into a new line of business without carrying out a market survey or doing your due diligence regarding the said business or product. This is because whatever product you are going into will not be consumed by you or by the members of your family. So it is important you look at what the market needs, how the market sees or will see this product/service, examine the capital outlay for the product and the expected income, examine how long it would take for you to recoup your investment or break even, examine the challenges and threats your new product will face in its desired location, look at what the competition is doing, and what the reaction of your competitors will be and the impact of this reaction on the success or otherwise of your product, etc. This is why we encourage start-ups to get a business plan before launching their businesses. No matter how small the effort is, getting adequate information regarding your business, your target market, your marketing strategy, business structure, investment dynamics and other imperatives will make your foray into business a success while helping you escape business failure in the marketplace.
Business is both an art and a science. The art aspect of business deals with how the human elements are successfully fused in a marriage of common goal and destiny, while the science aspect means that you can actually research, observe, gather facts and analyse same to arrive at an objective conclusion regarding the business or develop some predictability in your results or outcomes. Businesses therefore fail because of the lack of or inadequate information and due diligence carried out before the launch and during the life of such enterprises.