Side by side with thriving businesses, the constant rate of failure of many of them is a common feature. Failure can stem from a diversity of factors, and the size of the business does not enter into the equation, nor does the sector of activity. Whatever their size, businesses face difficulties of the same nature and sadly, business owners often fail to take lessons from the disappearance of other businesses. In whatever sector these entities operate, 75% of business principles and an equal percentage of causes of failure apply to all of them across the board.
The causes of failure can be diverse and here are some of them:
1) a declining sector of activity due to obsolescence of the product or service offered or changes in customer demand;
2) overtrading and rapid expansion which is not in keeping with the cash generation capacity of the business, resulting in over indebtedness and stretched cash flow;
3) failure to keep pace with change (in customer demand, competitor behaviour, legislation and supply side problems);
4) vertical integration involving important cash outlay and substantial additional overheads when the business does not sit on top of its market and demand goes down suddenly;
5) premium product manufacturers changing focus from a traditional niche market to an enlarged market whose demands and behaviour are different;
6) making gross marketing errors;
7) “growing fat” by taking on board increased overheads and new, costly investments which are not necessary (this paradoxically happens in a period where the enterprise is thriving);
8) “empire building”, by wanting to eliminate the outsourcing of services like advertising, vehicle fleet maintenance, wholesale distribution and subcontracted transport costs. This materialises by the setting up of accessory businesses at the periphery of the main business, which end up losing money while taking considerable management time and locking cash.
Below are some examples of top of the range, international businesses which have failed and whose cases are landmarks in the history of business.
Parker pens – Enlarging the traditional market
Parker is a brand which used to dominate undividedly the upper end of the fountain pen market. Of course, it was expensive, but it had established an image which dictated its high price. In its range, the Parker 51 had reached the stage of an icon as not only a highly performing pen, but more importantly a status symbol.
At a certain point in time, with a view to capturing a larger market, they diversified their product offering by introducing a cheaper version of “look alike” pens under the same Parker brand and the same visual identity (the famous Parker arrow) that would be affordable to lower segments of the market and bring in mass sales. This was commercially successful, but the decision makers overlooked the fact that upmarket customers have a dislike for seeing ordinary persons having access to a product which they use, and which gives them the exclusivity of the image attached to the brand. This is human psychology which every producer of luxury goods should know and take advantage of, by keeping the exclusivity tag attached to the product and asking for a much higher price than the generic product. Buyers of luxury goods are driven by subjectivity (of being part of a closed circle) rather than by objectivity (looking for value-for-money products).
This psychology had been overlooked by Parker, and it resulted in an iconic product being less and less appealing to a sophisticated and lucrative market which it had dominated for decades.
The new range of pens, which was introduced to be affordable to the mass market, had nothing fundamentally lacking in its quality, but it had diluted the perception of sophistication of the brand and the image which made people willing to pay much more to afford it. Parker is no longer a meaningful player in a business whose volume has considerably reduced with the use of laptops and, to every keen observer, it has lost its iconic image.
Eastman Kodak – Missing the train
This company dominated the world for one hundred years with its photographic films under the Kodak brand name. The domination was such that the name of the product became generic for cameras, as Frigidaire was (and still is) for refrigerators and Hoover was for vacuum cleaners in Great Britain. In those days you would not buy a camera, but a Kodak, whatever be the real brand name.
Then the digital camera was developed by individual researchers and made a revolution in the photography market which is still going on today, by eliminating the use of films and the chore of having them processed and printed. Very often inventions are made by engineers and other creative people not having the necessary funds to launch their invention under a brand name and embark on mass production and sales and distribution. Dell computers had a very modest start in a garage. The only way for an inventor to see his product reach great heights is to sell the know- how to large companies which would produce and market them, paying them a royalty.
It is more than probable that digital camera technology must have been proposed to Eastman Kodak in the first instance as a giant in its line of business and owner of a world-famous brand name. Somehow, Kodak did not engage itself in the production of digital cameras and the hierarchy of the company is reported to have said at that time that they could not envisage photography without photographic films.
Today we know that the whole market has been taken over by cheaper digital cameras either as standalone equipment or incorporated in mass market electronic consumer goods like mobile phones. Whatever the reason, Kodak has missed the train and is no longer the icon that it used to be.
This is a case study which illustrates not only failure to adapt to change, but the high vulnerability of any company which is a one product company, whatever be the usefulness of the product and whatever its brand strength.
The British car industry – Failure to see new opportunities
Great Britain used to be a world player in the production of cars. British cars, under prestigious brand names like Austin, Vauxhall, Hillman, MG and Morris used to be synonymous with quality and security and were sold worldwide with a more pronounced presence in the British Commonwealth.
The emergence of Japan as a car maker saw a sharp reduction in price. The Japanese had well read the market and found an avenue for budget cars. They changed several inputs like thickness of body steel and downgraded the interior of their cars to fit into the budget of the new, extended customer base which they were targeting.
The British car industry did not follow, for their own reasons and this once thriving industry is now a thing of the past. The early introduction of robotised production in Japan to gain in productivity and save on labour, and the delocalisation of many car producers from Europe to countries offering cheaper labour completed the disaster for British cars. Today it must be heartbreaking for elderly British citizens to see MG, one of their icons of which they were very proud, carrying a “Made in China” label.
The MINI, pioneer of small size cars, was a legendary car which pioneered the introduction of small cars and which made history with its ground-breaking transversal engine to save space in its engine compartment. This car of high emotional value for British people is now produced by Germans. But the original Mini had a soul for having been the most affordable car for millions of people and probably their first buy, which the expensive and new generation of Mini’s manufactured by BMW does not have.
The original Mini remains a landmark in dozens of countries and it has acquired the status of a vintage car. It would perhaps surprise many people to learn that spare parts for a car which has no longer been in production for 40 years, are still manufactured in many countries. The Mini is an example of provoked change to which all car manufacturers have had to adapt, but British manufacturers did not have the vision to expand the production of budget cars based on their own model which they invented. Thanks to the Mini, small cars now rule the world market for being fuel-effective and fitting into a limited budget to attract mass customers worldwide, but the legendary Mini is part of history.
Let us now dwell on two contemporary examples of marketing errors.
The Airbus A 380
This plane is a jewel of technology, ambiance and comfort, and was launched by Airbus Industrie as an alternative to the highly successful Boeing 747. It has a larger carrying capacity which means that the operating cost per passenger, if the plane is near full, is lower than the Boeing 747.
Airbus put together an attractive package of design, equipment performance, price and financing possibilities to make its plane appealing to airline companies and managed to enlist the best of them right from the start, to drive its sales to other companies. The plane was initially successful, but it soon became clear that using it at near full capacity was difficult except for giants like Emirates. Most airlines had to operate at a loss, and sales dwindled before coming to a halt.
What Airbus has overlooked is that it has a dual customer base consisting of airline companies and the general travelling public. It is a fact that most people will not admit, but 60% of air travellers are afraid of turbulence, and some of them are crippled by this fear. It just so happens that the A 380 simply beats turbulence for reasons that we will never know, but it has never advertised this unique feature which has an appeal for every traveller. Had it done so, the general travelling public would have been alert to it, would have opted for the A 380 as its first choice and would have created a “pull effect” which would have compelled airlines to always have it on offer.
This pull effect is a powerful selling argument because at the end of the day, the choice of the end customer is supreme and is compelling for any manufacturer. Coca Cola has the biggest pull effect as a product worldwide, and no retail outlet can afford not to have it on its shelf. Airbus has opted for a strategy which puts aside its biggest promoter, namely the travelling public and concentrates on the “push effect” of its sales package to airlines.
Haagen-Dazs ice cream – Downgrading product image and appeal
This product was launched in the uppermost segment of the ice cream market where the American company Baskin Robbins was the leader. It developed a product quality and a range of flavours which made it almost instantly appealing to this niche market while commanding a high price. It was “the” product to be consumed in ice cream parlours. In marketing terms, ice cream parlours do not sell mere ice cream but a combination of a unique eating sensation, a feeling of being exclusive and a reason for a family outing. This allows them to command high prices for their ice cream.
At a certain point, in a move to enlarge its target market, the brand was introduced in hypermarkets and other less sophisticated sales outlets. Contrary to ice cream parlours, hypermarkets appeal to the mass market and the products which they sell must satisfy the strict value for money concept. Product image calling for a premium price is not an exigency of that market. Haagen Dazs ice cream had to be introduced as an affordable product in this new market dictated by price. Since it had to respect its high product quality using sophisticated ingredients, which implies a high cost of production, the cost saving could only be made on the packaging.
Everybody knows that Haagen Dazs in supermarkets is sold in ice cream tubs which in my mind do not give it a better appeal than products of ordinary ice cream brands. In my opinion, the Haagen Dazs image as a premium product is suffering, having been turned into a mass market product, trying to appeal to a wide customer base to whom price is a determining factor. Winning back its exclusive image can be a costly and lengthy exercise. For those who know the quality of the product, and were probably ice cream parlour customers, why would they pay a premium price for such a product in an ice cream parlour, (where the price is much higher is higher) when it is now available in a supermarket across the road from their residence for less money?
At the end of the day, Haagen Dazs may forever remain a marginal product in hypermarkets, commanding a low price by its own standards, but being still more expensive than off-the-shelf ice cream, and this makes it uncompetitive on price in spite of all its cost savings and appealing to a restricted customer base.
The basic rules of business are the same, whatever the size of the enterprise.
Failure is not the exclusivity of small businesses facing big, ruthless customers and suppliers, lacking financial capacity and not having the economies of scale to produce at lower cost because of their small volume. The basic rules of business are the same, whatever the size of the enterprise. These are: the need for innovation, keeping cash (or borrowing capacity) in reserve to finance expansion, being attentive to customers’ needs and reactions, monitoring competitors closely, adding competitive edges to products, finding a target market and communicating with it, using the right message, the appropriate language and the relevant media.
By Mubarak Sooltangos ([email protected])
Business trainer, a strategy and management consultant and author of Business Inside Out (2018) and World Crisis – The Only Way Out (2020).
Courtesy: May-June 2023 issue of CONJONCTURE, the electronic journal of PluriConseil.