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Top 7 Reasons Why a Business Fails

It’s hard to say goodbye. That’s not just a cliché. Saying goodbye is fairly tough—to a person; to your dream; to your cute little business! It’s tough to accept the fact when your business fails.

You had a dream… you had an idea… you wanted it to work, and you took the bold step to establish a business. But somehow things got haywire. When the circumstances demand the big decision, it is often heart wrenching to curb your emotions and take that big step.

After all, you have spent your money… you have spent your time… you have shed your tears, your blood, and your sweat to build your dream. By now you have an emotional attachment to your business. You feel shattered… you feel embarrassed… you feel ashamed.

Many thoughts run through your head. You console yourself with the thoughts of closing down for a while to get your act together, and starting again when you have the conducive environment. You find yourself determined to give your idea a second shot; albeit with the lessons you have learnt until now. You think about saving your assets until you are ready for the second stint. You consider the associated cost in holding on to the assets for all that time. And when you find it even more challenging to holding on to assets, it breaks you even more.

You ask yourself questions. What if I keep going for a little bit more before calling it a day? Will I really be able to start again? However, sticking on to the business that is not working is tough. You keep injecting money. You keep struggling with your staff, your clients, your sales, and more importantly, yourself.

Closing down a business is not for the faint hearts.

Really. But the good news is: closing down a business makes you tough and wise; only if you realize, that is.

When it is clear the business is failing, it is time to retrospect

What You Need When Your Business Fails?

All it is required to stand up again is courage, will and determination. Courage to face the situation and consequences of your decision to start again. Will to succeed in the face of all adversaries. Determination to make your dream come true.

Failure is not the end of the world. Failure is neither the opposite of success. On contrary, failure is the first step towards success.

Take the heart from what Thomas Edison said after his many unsuccessful attempts in making a light bulb:

“I have learned fifty thousand ways it cannot be done and therefore I am fifty thousand times nearer the final successful experiment.”

Thomas Edison

THIS is the mindset that gets you going. THIS is the mindset you need to achieve your dream.

Stop. Relax. And retrospect on what went wrong.

Why a Business Fails?

It is always good to think twice before starting a new business. According to an article published in Forbes, about 90% of startups fail globally. As a result, only one out of ten turns out to be a prosperous and sustainable business.

There could be several reasons why a business fails.

1. Choosing a Wrong Product

The biggest reason for a failed startup is creating a solution that never really had a problem. Fortune mentioned that about 42% of the startups fail because they work on a product that lacks market need.

You may have a great idea. You may consider your idea the best, and you perceive it to be loved by your clients too. But how would you know if your customers will actually like it? In fact, most entrepreneurs are afraid of their idea being rejected. When you are in love with your idea, I know it is difficult to hear any opposite opinions. But these are the opinions that can save you from even bigger heartbreak of seeing your business shutting down.

Unfortunately, most business owners start without proper market research. They go with their instincts, and just hope everyone likes it.

Lack of market research can be catastrophic for any business.

The method of conducting market research can be different for different businesses. Identify your niche, potential customers, and then depending on your business area, conduct your market research. If you are not sure about how you should proceed, check with the experts in your field. You can always find guidance on the internet on carrying out the market research specific to your business.

Whatever you do, do not ignore going through this extremely important process. As tiring or difficult as it may sound, but this is the number one effort that can grow or fail your business. Again, whatever you have to do to get this done, you must do it. Cannot emphasize enough.

2. Lack of Clear Vision

Many entrepreneurs start with the hazy picture of where they want to be, and what exactly they want to achieve. Without a clear vision, your business will be pulled in many different directions. It will be harder to create strategies, steer your business and grow accordingly.

If your business lacks direction, there is a little or no growth, you are having a hard time taking a decision, or you are experiencing costly delays, then your business lacks a long term vision. In this case, you immediately need to take action. You must set goals for your business, create a clear plan, define path, and stick to your vision all the way.

Keep in mind that plans are basically made to give your business a clear direction. Almost no plan goes hundred percent as it was originally planned. Changes to the plans are mandatory. However, those changes should not be at the cost of your vision.

Lacking of clear vision often turns the focus away from quality towards quantity. Many business owners start a business and try to take as much business as possible. In doing so, they become too diverse in their offerings, too often too quickly.

Having a clear vision will help you focus on what works in your business. It will allow you to take out anything that does not contribute towards your business goals. Having a clear vision also helps you in creating a compact marketing strategy. And, with a clear strategy, you can better define your market, your clients, and steps that you must take to achieve success.

3. Leadership’s Inability to Inspire

The leadership’s role is to create strategies, assemble teams, create work culture, provide guidance, and keep an eye on current and emerging business opportunities.

The ability for a leader to make everyone see what he or she is seeing is of vital importance. A leader must be able to transfer his or her vision to the team, so that the team works with the same energy and enthusiasm towards the goal.

Leadership should be able to demonstrate a constancy of character to attain trust, confidence and loyalty. As a business owner, you should be able to communicate your business vision to everyone that is associated with the business. Without having a strong character, it is not possible to pass on your mind and vision to the team.

4. Poor Management

It is the job of management to hire, train and mentor employees. If the employees are unable to get the work done, then the onus of failure falls on the management.

One of the common reasons why a small business fails is the owners’ inability to manage their team and business appropriately. While the owner may have the ability to create and sell a viable product or service, they often lack the qualities of a strong manager, or do not have adequate time to do so. Without a proper management team, there are high chances of mismanaging certain business aspects, such as finances, hiring, sales, marketing, and so on.

Smart business owners delegate the activities they do not perform well to someone who can. Therefore, it is important for the business owner to not only know his or her own abilities well, but also should be able to identify the abilities in his or her staff.

5. Lack of Finances

Another aspect of poor management results in the lack of finances. It is also one of the biggest reasons why a business fails. I will put the “lack of finances” again down to the management failure, because it is ultimately the management’s responsibility to appropriately manage business finances.

The business owners are usually more aware of their day to day expenses. They usually know their fixed and variable overhead expenses, such as salaries, rent, utilities, and so on. However, they are usually not totally aware of how much revenue they are generating through their sales of products or services. This disconnects leads to financial shortfall, which can quickly turn a business into a financial nightmare.

Moreover, the companies that operate in a highly saturated market, often provide their services or products at a far lower prices than their competitors. They do so with an intent to attract new customers. While this strategy is successful in some cases, keeping the prices too low for too long would ultimately result in shutting down the business. On the flip side, higher prices may result in good revenues, but should be backed with better quality, and smart sales and marketing strategies. If prices are not managed properly, the results would be unfavorable.

6. Poor Marketing

Small business owners often fail to prepare for the adequate marketing needs in their early marketing campaigns. Many business owners underestimate marketing requirements, and often miscalculate the capital required, customer reach, and customer conversion ratio projections.

Since marketing is crucial for the business, especially in the early stages, it is necessary to ensure that you have allocated sufficient budget for your marketing needs. Also, realistic projections related to customer reach, and sales conversion ratio is of critical importance for a successful campaign. Without proper consideration and planning, the marketing campaigns are more likely to fail, or eat more budget but still remain ineffective.

7. Failure to Adapt to the Changing Market

Business that do not timely adapt to the latest trends in the field are only just waiting for the failure. Most business changes occur due to increased competition, changed customer preferences or unpredictable economic environment.

As a business owner, you must keep yourself updated with the latest market trends, and how your competitors are adapting to these changes. And therefore, you should also adjust your business accordingly. In fact, more appropriately, you should be able to foresee the market changes in advance, and plan your strategy ahead of time.

The companies that deal with the continuous changes and turn the change into opportunity, will ultimately gain the competitive edge in the market. And the companies that fail to “ride the trend” often go down sooner than later.

We have seen many companies fail because they could not adapt to market change in time. For example, Nokia, who once was the biggest manufacturer of mobile devices, failed miserably because they could not keep pace with changing customer needs. They failed to catch up with Apple’s iPhone, resisted the change, and stubbornly stuck to Symbian OS, rather than adopting the Android OS like everyone else was doing. They could not improve their technology to match with that of Apple’s. So they ultimately ended up being sold to Microsoft.

So Why a Business Fails: Conclusion

Starting a business without a proper plan is a recipe of disaster.

If you fail to plan, you are planning to fail.”

Benjamin Franklin

To tell you the truth, businesses do not fail, but the leaders do. It basically all boils down to the leadership failure. It is ultimately the leadership’s responsibility to guide the business all along, and make the changes as necessary.

Some leaders are too tolerant or resistant to the idea of change. They are also afraid of doing experiments, and are not willing to appreciate a new idea. Then there are some leaders who are obsessed with the idea of perfection. So they press on things that are not necessarily required. Trying to achieve perfection is one of the biggest obstacles in growth.

Some leaders genuinely lack leadership or management skills that are required to run a smooth and successful business. If you happen to be such an aspiring leader, it is always a good idea to work with a business mentor that help you hone your skills to become a successful business owner.

Well, at the end of the day, as a business owner, if your business fails, you are only yourself to blame.

Check out this article to learn about the challenges for expat entrepreneurs in China.

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Entrepreneurship General Topics and tips

Challenges for Expat Entrepreneurs in China

China, as everyone knows, is a business hub of the world. Every year, thousands a new companies and ventures are born here. The market and business activities have attracted many expat entrepreneurs as well. It has now become much easier to do business in China than it was a decade ago. Yet, doing business here does not mean everyone makes money. I have literally seen hundreds, if not thousands, of businesses starting and closing down in a short while. According to an article published in Forbes, about 90% of start-ups fail globally. As a result, only one out of ten turns out to be a prosperous and sustainable business. These numbers look even grimmer in China.

Entrepreneurs in China team meeting
Entrepreneurship in China brings fruits only with proper homework

Entrepreneurship is not just starting a new company or a business. It is a mechanism of recognizing opportunities, taking on new challenges, generating resources, and creating value for your customers. Whenever you take on a new challenge, you have to face a possibility of failure—and entrepreneurship is not different. Entrepreneurship is a name of taking a chance, where your chances of success heavily depend on how good your homework is. Being an expat entrepreneur in China adds new dimensions to this challenge.

COVID-19 is coming under better control in China. According to the accounting firm PwC, investments by private equity and venture capital firms in China’s technology industry are expected to grow strongly this year.

In 2018, the total venture capital surpassed $70 billion, only a stunning 4% of these start-ups successfully reached the D-Round and only 2% went public. More staggeringly, none of these start-ups were founded or co-founded by a foreign entrepreneur.

This article discusses the low-level, but high-impact challenges that most non-native new business owners are likely to face in China.

Proficiency with Local Language

The first and foremost requirement for doing any business in China is overcoming the language barrier between you and everyone you are going to meet and work here. There is no running away from this fact. The main language of communication in China is naturally Mandarin Chinese. English does not work here. You will constantly find yourself itching to be able to communicate with the people around you. The young generation nowadays have much better understanding of English than it was a decade ago. Even then, you will still need the Chinese language to get through your day, any day.

Language barrier keeps you away from the pleasure and satisfaction of success. At times, it gets quite frustrating when you are wanting to communicate with your staff, with someone at the bank, or with a clerk behind the desk at some government office.

If you are stepping into a technology business, then you have high chances of finding the staff that could communicate with you enough using English. However, if your area of business is anything else, such as hospitality (restaurant/eatery/cafe), manufacturing, trading and so on, then your 98% of communication will require at least some level of proficiency in Chinese language. Therefore, gaining language proficiency for the entrepreneurs in China is very important.

Use translation applications for small and quick tasks

There are several translation applications available to translate pictures. These applications can save you from reading Chinese, but talking would still remain a handicap. To translate text and pictures, you can install the online “Baidu Translate” application on your mobile phone. In offline dictionaries, the phone applications named “Pleco Chinese Dictionary” and “Hanping Chinese Dictionary” are among the best.

Documentation, Legal Work, Bureaucratic Hurdles

Getting your business registered and obtaining a business license requires quite a bit of deliberation. It may not require mentioning that you must complete all the legal requirements and procedures before you entertain your first client. Starting operations without completing all the requirements may have some sort of consequences. These consequences may range from simple warning to deportation from the country, depending on the level of violation.

To register your business, you may have to visit several different government offices. You will also need to make frequent visits to some of these or other offices for routine business operations. In many cases, you will need to fill many forms (read: too many). You will also need to follow notices, and talk to the staff to get the things done. The good part of it is that, most of the staff in these offices will help you by going out of their way. In fact, in my personal experience, most of the staff here in these offices are quite welcoming and helping. If you are that lucky, the staff would guide you in your next steps as well, which will make things much easier for you.

Financing

If you are looking to raise finances from inside China, then it can turn out to be quite a challenge. Most entrepreneurs in China are either not eligible to secure loans from banks. Generally speaking, it is easier for a local investor to trust their fellow citizen than to a foreigner. I believe this phenomenon is not unique to China, but lack of understanding of each other’s culture is principally the cause. Some Chinese universities do offer financing programs and incubation centers for young entrepreneurs in China. So if you are a fresh graduate budding out of a Chinese university, you would definitely want to get a shot at your luck.

Hiring Staff

First thing first: It is illegal to hire employees for entrepreneurs in China for a non-registered entity. Make sure you have already completed your company registration process before you hire your first employee.

Hiring and staffing has a cost in China. If you are starting with little funds, it can be challenging to hire employees for your business. Still, it is worthwhile to hire staff through a Professional Employment Organization (PEO) or an employment agency.

Hiring through PEO or an employment agency makes it so much easier and quicker for you to find the required local talent. These agencies usually charge a portion of the hired staff’s salary. Even so, this cost is really worth it in a longer term.

You may also want to attempt hiring the staff directly by yourself. Job vacancies in China are usually propagated through social media applications, HR applications and HR websites. However, these HR applications and websites require an 18-digit Chinese ID card number, and the scan of your business license. Only then they allow you to post an ad on their platform. Moreover, the Chinese ID card number must be of the same person whose name is written on the business license. This regulation makes it impractical for a foreigner to use these hiring resources. Let’s hope these websites and applications will soon allow registration with foreigner’s passport as well. Until that does not happen, I would resort to employment agencies for hiring my staff any time.

Keep into account the mandatory benefits and compensations

In China, employees usually expect certain benefits from the company. Most companies offer year-end bonuses or 13-month salary in a calendar year. In addition, these companies also offer health, housing and other benefits. You must register for the employees Social Security Program with the government. China’s Social Security Program consists of the following 5 mandatory insurance schemes:

  • Pension fund
  • Medical insurance 
  • Industrial injury insurance
  • Unemployment insurance
  • Maternity insurance
  • Housing fund

Different cities and provinces have different policies of employee payroll, taxation, and mandatory benefits and compensations. Moreover, these policies keep on changing. Therefore, you must keep abreast of the latest policies throughout the year.

Sales and Marketing

Chinese buyers are mostly influenced by social approval and recommendations. They have faced many problems with the quality of local products. Due to these problems, those who afford, would prefer a branded product over a non-branded one. In China, branding is everything.A brand name that is well-known indicates the endorsement of its quality, and therefore, its credibility. 

However, quality and reliability are not the only reasons for Chinese buyers to choose a well-known brand item. Generally, Chinese people desire to be seen as exquisite, elegant and higher in status. They choose product based on product’s social acceptance, rather than its personal appeal. Therefore, only those name brand items that carry an exponential amount of value with their name are mostly embraced here. 

Chinese buyers almost entirely rely on recommendations and product reviews. In a report by Forbes, more than 300 million Chinese people report on only moving forward with a purchase after getting consent from their peers on social media.

Focus more on marketing around your brand name and its quality

This buying culture that revolves around brand, social approval and recommendations makes it a challenge for a new start-up to break into the market with new products. When marketing an item in China, you will need to focus more on marketing around the name brand and the quality of that name. Social media marketing in China is of paramount importance to build your brand reputation and awareness among locals. You would definitely want to stay active on local social media applications or hire a staff or a marketing agency to do that on your behalf.

Understanding Local Culture and Etiquette 

Chinese culture differs tremendously in some aspects from other parts of the world. New entrepreneurs in China are usually unaware of most of the local culture and etiquette. Hoping to run a business without the proper understanding of the local culture could be catastrophic for your business. This topic warrants a separate article of its own, but a brief mentioning of local culture and general etiquette would suffice here.

Guanxi (关系) plays a great role in Chinese culture

Guanxi (关系) is your relationship between you and others, and the favors owed between you and them. It is essential to form friendships and alliances with your staff, clients, suppliers and other business owners to get the things done. The Chinese usually make use of gifts, dinners, sports and other social activities to maintain their relationship networks. On the other hand, causing the loss of face can be dangerous in China, as it strains relationships. If you are already good at making relationships, then it is good for your business. Otherwise, you would need to develop this skill in order to bring success to your business.

Meeting culture in China is also a bit different, as it is based on Guanxi

When meeting new people, the Chinese would want to get to know them more as a person, rather than getting down to business immediately. In other parts of the world, business is usually discussed first, and dinners or other social activities follow. However, it is the opposite in China. It is common to gather around a dinner table to eat and drink for hours, before finally talking about business. Sometimes, Chinese people do not even discuss the business in the first couple of meetings. They usually discuss business after developing some sort of comfort with the counterparts.

Communication gap between low and high ranked staff

When working with other companies, you may feel frustrated over a communication gap among their staff. The low ranked staff in China are supposed to maintain a “power distance” from the high ranked staff, and usually do not mingle or talk freely with each other. Also, the Chinese companies usually do not discuss the course of action with their low ranked staff. Here, orders are not debatable, and are expected to be carried out on an “as is” basis. 

Conclusion

If you are an expat in China and aspiring to be a business owner, then learning the Chinese language should be your first step towards greatness.

To become a successful entrepreneur, you must keep more focus on working on your business, and not working in your business.

If you are a young entrepreneur, you would want to find a mentor in business. A good mentor would be the one who understands China, its culture, and Chinese business at large. As an alternative, it may be a good idea to start with a job that matches your business goals. This job can provide you the enough opportunity to learn whatever you will need to become a successful business owner.

If you are already an experienced business owner, and want to break into the Chinese market, then you may want to consider partnering with a local Chinese company. It would also be a good idea to engage with a local lawyer, hiring agency and a financial management agency. These agencies would help you in keeping all your practices always in-line with the current regulations. 

Many entrepreneurs in China are unaware of the intellectual property (IP) legal landscape and why their IP loss happens. We did a summary analysis of the 6 more common mistakes most companies and entrepreneurs in China make. Losing intellectual property would usually result in losing chances of potential growth for entrepreneurs in China.

If you are able to overcome the challenges discussed in this article, then doing business in China could be quite rewarding.

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