Why do some companies fail while others prosper?

Why do some companies fail while others prosper?

Why do some companies fail while others prosper? 1200 630 Colin Kennedy
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“It’s a funny market,” according to one business owner. “Some businesses I know are thriving, while others in the same industry are struggling just for cashflow.”

The truth is that perhaps it is less a ‘funny market’ and more symptomatic of the type of market we have here in New Zealand and, importantly, how we respond to that market.

Director of the chartered accounting firm and business advisors BetterCo in Auckland, Peter Prema, says that while media proudly refer to New Zealand as the easiest place in the world to start a business – according to the World Bank – it may be more a curse than a blessing.

“It is easy to start a business here, but perhaps it is one of the most difficult places in the world to run a business because our market is so small,” says Prema. “There are so many businesses just getting by.”

Not only is New Zealand small, but the ease with which anybody can start a business may be part of the problem because with it comes competition and sometimes a race to the bottom on price just to survive. 

A study by Stanford University, Why Do Some Companies Thrive While Others Fail?, calls it ‘density dependence’.

Researchers Michael Hannan and Glenn Carroll write in their book, The Demography of Corporations and Industries, that “organisations’ vital rates — their founding rates, growth, and mortality — depend on the total number of organisations within the relevant population”. 

In biology, density dependence describes a situation in which “crowding, predators and competition curtail population growth”.

Perhaps we can look to the natural world – to survival strategies creatures adopt when there’s too much competition for food, water and air – for one or two lessons about how to thrive in a country where there is too much competition and not enough customers. 

Cannibalising 

Hannan and Carroll refer to one phenomenon where businesses that are established cannibalise on the failures of companies that have gone under.

This may be taking over or buying out smaller businesses that are struggling (for their customers, intellectual property et cetera) or adopting any innovations those that failed may have brought to the market.

In some ways, it contradicts the statement that the New Zealand business environment is oversubscribed because it shows that companies need competition to learn and innovate. It also explains why some thrive, and others expire – it’s the law of the jungle out there.

Competitive performance

Any ecologist will tell you that animals survive based on their performance while also relying on a bit of luck. There is a tendency by many SME owners to be head down producing the work – working in the business – instead of on the business. Those working on the business demonstrate ‘competitive performance’. They are primarily concerned with growing a company than with the nuts and bolts of what they do.

If they get enough sales, they free up cash and time to hire people to work in the business. Few do this because it is easier to get caught up in the nuts and bolts. Working in the business gives us a sense of accomplishment and certainty – although it’s a false sense of certainty – whereas working on the businesses exposes us to more unknowns and our lack of skills in some areas.

Ecological niche

In the animal world, a species will often niche to a specific environment. An ecological niche describes “how an organism or population responds to the distribution of resources and competitors and how it, in turn, alters those same factors”. In other words, animals adapt their behaviour according to the environment they are operating within. 

For businesses, this could mean adopting a specific market niche (your new environment) and changing your behaviour (marketing, fulfilment, et cetera) to meet the particular market’s needs. 

Many businesses resist this because of the ‘fear of missing out’ (FOMO) – precisely because they say the local market is too small to niche.

The high number of business failures in New Zealand suggests that perhaps when you try to be ‘everything to anybody’, you end up being ‘nothing to nobody’.

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