Why do businesses fail, really? Or to paraphrase it: What does a business owner need to do to succeed? Spending the last days thinking about this issue, I came to the conclusion that businesses fail because building a business is not easy, and this fact is what a business owner needs to know. Let me explain why.
From a commercial point of view, a successful business boils down to 3 numbers: Revenue minus Costs equals Profit. So the commercial questions are: How much do we make? How much do we spend? Are we spending less than we make? So far so good. Though this does not answer the very first question.
The very first question coming ahead of trio above is this: Why are you in business? My friend Gavin said to me the other day “Obviously most people go into business because they don’t want to work for someone else”, which rang a bell. I had read this quite a while ago in Michael E. Gerber’s “The E-Myth”, a book in which he explains in a very clear way why most businesses fail, namely exact for this reason: Starting up a business just because you don’t want to work for someone else is not a sustainable model. But I’m not sure that I agree with what he suggests to do in any case.
What Gerber says is that you need to have systems that make processes so easy that even the least qualified person can do them. Then comes Seth Godin and announces that businesses that rely on simplifying processes and cutting costs so they can sell their products with higher margin (or cheaper to keep or increase their market share) are racing to the bottom and this will cause their demise.
On the other hand, there is Jim Collins exemplifying visionary companies that sometimes were founded even without an idea of what they should be doing, ending up in being super-companies like Johnson & Johnson, HP, IBM or Merck. What you tend to forget though, because Collins never ever mentions that, is that these companies also have (or used to have) factories. And to be frank, I do not believe that in these factories the only people employed are those who are totally committed to the company’s vision. Because, and this is what we must never forget, as valuable as they are as humans, they are rarely considered more than people who are needed to operate the machines. And when the products these machines have been churning out every second are obsolete, the machines operators are out of their job. Unless they can be retrained and there’s no place in this world where it’s not cheaper to build a new factory and have people work in totally different conditions. So yes, they’re out of their job.
But let’s go back one step from this, because the chances of someone building a factory from scratch in a post-industrial environment like Europe are rather small. Let’s say someone wants to open a book store, a typical small business with an obvious purpose: They’re selling books. And it’s an interesting business from a commercial point of view, because it’s hard to find a commercial reason for doing that at all. We’ve got Amazon, right?
So it’s not the idea that is the foundation for a business. One month ago, Robin Dickinson started a micro-movement by writing his outstanding sharewords post. Until now it has had thousands of views, hundreds of comments and a great community helping each other has been built there. It worked because it was a good idea, because it was free, and there was a development, because every day there were (and still are) more people joining in. A week ago, someone had the idea of turning this into a real life book, saying he was really passionate the whole thing BUT his publishing company needed some sort of proof of profitability to commit to this venture — so there we are again: What’s the business model? Who’s buying what for which reason? What’s the margin? How long can we make money from it? It turns out that once again, converting a web freebie into a commercial product is not that easy. Different medium, different audience, reduced interaction (and that’s where the value is!) — what’s the point?
That’s how you do business. It’s never about the idea. It’s always about bottom line. On the other hand, change is all about the idea. Because the only question change is asking is “What if..?”. So once again, why open a bookstore? Because (as of now) it is still a sustainable business model as long as you’re standing out, not fitting in. And if you’re passionate about books and making someone happy by selling them a good one, this is the only way for you to go. Barnes & Noble or Borders don’t do that. They’re just big stores selling print products and stationery.
Whatever your business is about, make sure it’s not depending on one idea alone. Ideas come and go like fashion. I do not believe that a company “making iPhone apps” will survive for long. Neither will it be bought by another company. On the other hand, a company creating software solutions for a specific audience is a totally different deal, as long as this is really the core of the business and not just an inflated term to say you’re making iPhone apps.