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Abstract

This essay is devoted to make a detailed insight on the main reasons of entrepreneurship failure. Paper’s another goal is to provide an example of the company, which failed to complete its mission and as almost the half of the small businesses did not manage to exist more than five years. First part of the essay is the introduction and description of company. Second part is the basic research on reasons of the small business failure. The third part of the paper contains ways to avoid business failure.

The information about the company was taken and mostly based on the Marc Hedland’s article about his company and its history. Statistical data is retrieved mainly from the SBA Office of the Advocacy website as it is the main and the most trustable resource dealing with statistical information about the small business.

Keywords: small business, failure.

Small Business Failure

Role of the Small Business in the country economy

There were 27,9 million small businesses in 2010 and although most of them are run by a single person, this segment of business created 11,8 million jobs (SBA Office of Advocacy, 2012). These facts demonstrate that the share of GDP accumulated by small businesses’ activities is important for USA’s economy.  However, the economic environment in the USA is not that propitious for small businesses, because of the high competition and low purchasing power of consumers due to high unemployment rates and economic recession. Moreover, most of entrepreneurs launching businesses are inexperienced and unprepared to this kind of activity. As a result, they make mistakes, which lead to bankruptcy and closing up. Therefore, it is indicated that almost half of small businesses are experiencing failure during five years of activity (SBA Office of Advocacy, 2012). Due to the important role small businesses play, it is extremely vital to define the reasons of their failure in order to success.

Structure of the Paper

This paper is devoted to analyze and make conclusion on the specific case of small business failure. First part of the research contains the detailed information about company, its activities and performance. Also, there is mentioned the main competitor of presented service and described the mission of the company.

Second part of the paper contains the common reasons of small businesses failure. The goal of this part is to define which of the reasons and factors caused the close up of the business.

Third part is devoted to define whether the small business could become successful and what had to be done in order to lead the company to prosperity.

Wesabe

The example of failed business chosen for this paper is the Wesabe service. It was started by Marc Hedlund and Jason Knight in November 2006. The mission of service was to help people to manage their personal finances and make the best consumer choices in order to cut their expenses.

The Wesabe one of the first to offer financial management services. However, it was the first to use the abilities of Web 2.0 and in a while it became a leader on the market due to the best performance (Hedland, 2010). The service offered various tools to cut your expenses. Firstly, due to the subject of the website it has attracted people interested in the best offers. Therefore, members of the community could have discussions on relevant subjects. For example, if one would be interested in the Amazon, eBay or any other service benefits, one  could take an advice in Wesabe Group section of the website. However, the best and the easiest way to use the benefits of the service became available after uploading one’s financial statements.

On the basis of the data provided by the customer the service screened the best way to cut one’s expenses and gave useful advices. It also was considering customer’s preferences according to provided information.  For example, the customer has uploaded information on purchasing which one has purchased the Parker brand pen for 50 dollars on the eBay. After processing this information the service indicated that there were better purchases made by other users (the same pen on the Amazon was bought for 37 dollars). Definitely, the service guaranteed confidentiality of the customers’ personal financial data. There were developed additional options like “spending targets” and “big goals”. First option was about planning one’s monthly expenses on certain category of goods, while the second one was devoted to initiate a discussion on the best choice between persons with the similar “big goal” (R. Needleman, 2006).

It is stated that the main competitor of the Wesabe was the Mint service which has been launched on September 2007. Offering the same service it had a different approach to the marketing activity and customer service. Due to the reasons which are disclosed in the next part of the paper, the Wesabe did not manage to continue its activity after July 31, 2010 (Hedlund, 2010).          

Main reasons of the small businesses failure

There are stated numerous possible reasons of failure. There are two main types of reasons of entrepreneur failure: difficult economic environment and the top-management incompetence (whether it is a corporation or a single person company) (Source).

Difficult economic environment includes: high competition on the market, economic recession, poor government support of small business, cataclisms etc. However, this research includes two points: high competition on the market and economic recession (as these are the problems small businesses in USA face).

The top management incompetence includes: lack of experience, insufficient capital, poor use of business funds (Mason, 2012), lack of vision, lack of organizational skills, poor HR management, poor competitive awareness, wrong approach, obsolescence, wrong understanding of consumer needs (Myatt, 2009).

Usually, there are several reasons of business failure. For example, inexperienced entrepreneur, no matter how talented he is, is likely to fail if choosing too competitive market.

High competition on the market – is one of the main reasons of businesses failure. The market with overfilled supply is doomed to lose the certain number of participants due to bankruptcy, low sales or merger of the small companies. Usually, the companies which fail are ruled by less competent managers or they had not enough time or resources to compete with large corporations in the same segment.  For example, the Varvitsiotis Architecture failed because large companies began the competition for all available projects (due to the recession and lack of big projects).

Economic recession – the rate of small businesses survival has decreased significantly due to the economic problems. However, as this condition is shared by all businesses it is all about the competence of management whether the company will survive or not.

Lack of experience is one of the most common reasons of business failure is being run by inexperienced person. However, it cannot be the main reason of failure, as there are many successful businesses started by novice entrepreneurs.

Lack of vision – is the inability of the management of company to consider the future performance of the company. Without the defined mission the company is likely to remain on the same turnover level and is doomed to fail in the long-term perspective.

Lack of organizational skills – is inability to provide fast and accurate accomplishment of tasks . Without clearly defined subordination, motivation to work and scheduling there won’t be any positive result. 

Poor human-resources management means that the management is not capable to recruit skilled and professional staff, . As a result work efficiency and labor intensity remain at a low level.  it is obvious that indicators like work efficiency, labor intensity and work effectiveness will remain at low level no matter how high the salary is.

Poor competitive awareness means that the management is not aware of special features, benefits and disadvantages of its competitors. Therefore, it is hard to show ones competitive advantage.

Wrong approach means that business does not add any value.. If the business does not bring any moral satisfaction to its owner and customers, it is likely that it won’t survive (Philips, 2011).

Obsolescence – management must keep abreast of the market changes, innovations in industry etc. in order to be able to provide the best performance of the company (Myatt, 2009).

Poor use of business funds is the common mistake. It is important to consider the necessary investments to business in the first place.  

Wrong understanding of consumer needs is the wrong imagine about what the consumer really needs.

Wesabe failure reasons

The given table is devoted to show which of the described above reasons are relevant to the Wesabe failure:

Table 1. Reasons relevant to Wesabe fail

Reasons

Relevant to Wesabe

Comments

Economic recession

No

It made people even more interested in cutting their expenditures (service was free of fee)

Lack of experience

No

The founders of company already had an experience of entrepreneurship

Lack of vision

No

The goal and mission of company were totally clear

Lack of organizational skills

No

 

Poor HR management

Yes

M. Hedlund, the founder of the Wesabe, did not really trust to the opinion of the hired group

Poor competitive awareness

No

They were aware of all strong and weak sides of competitors

Wrong approach

No

The founder of the company was sure the business was useful to the customers

Obsolescence

No

The Wesabe was one of the first services using Web 2.0

Poor use of business funds

No

There were no problems related to finances until the company faced the decrease of members in 2009

High competition on the market

Yes

Competition between internet services is specific. Therefore, if there are two similar services it is likely only the most convenient one will survive.

Insufficient capital

Yes

There were not enough funds to maintain the work of service in the end of Wesabe

Wrong understanding of consumer needs

Yes

Wesabe concentrated on developing tools to provide the ability to make the best choice by adjusting the service parameters. However, it was too complicated  system for consumers to deal with, so they have turned to Mint, which offered them full automation, although low accuracy

The Wesabe performance

According to the analysis provided in previous part of the paper there were four reasons of business failure: wrong understanding of customer needs, insufficient capital, poor HR management and high competition on the market. In order to analyze performance and define whether it was possible to avert a fail of the company it is necessary to make a detailed description of each reason and its consequences.

Insufficient capital.  Because of the lack of money there was no possibility to maintain the proper service for customers. Therefore, the decision to shut down the website was right and deliberate. Definitely, the company could start seeking for new investors, but considering the doubtless dominancy of the Mint there was a miserable possibility to get investments.

Poor HR management. Mr. Marc Hedlund has recognized (Hedlund, 2010) that he did not trust the view of the team he has hired. Definitely, the efficiency of work cannot be high if the CEO and his subordinates have controversial views. However, change of the personnel would not give any significant effect as the main reason of failure would still remain. 

High competition on the market.  Mint and Wesabe were leaders in this segment of market. It is possible that if Mint Company would not exist, Wesabe would become a successful business. However, there is nothing that could be done from this side.

Wrong understanding of customer needs. It is the main mistake of the Wesabe management which in combination with the launch of the Mint Company has caused the shut down of the Wesabe.

Wesabe tried to create the combination of sophisticated tools which could allow members buy at the best price. The problem of this approach was in misunderstanding of members’ psychology. There was the small amount of people ready to spend so much time to understand how to use this package of tools. Others preferred to use simple and maximally automated Mint. Due to the insight made by Mr. Hedlund Mint service, although automated, did not offer the best offers and was very inaccurate. On the other hand, Mint was convenient, it had better design and, as a result, better performance, although it did not complete its task on offering the best finance management service.

Therefore, Wesabe management made the fundamental mistake and due to scarce of capital funds, the only thing they could do in order to avert bankruptcy was the change of approach. They had to move from maximum functionality to maximum convenience. They already had advantage as they came first on the market, had sustainable growing number of members and properly working service; or they could let consumers to choose between the automated search and custom.

Another thing they could do to attract more members and overwhelm the competitor is providing well-performed advertising company which would contain the information about the difference between two services and advantages of the Wesabe.

Conclusion

This paper research was devoted to the analysis, research and description of small businesses failure reasons. There was also given an example of the business that has failed with detailed description of its activity, reasons of failure and possible solutions to avoid such an end. According to the paper it can be said that the main reasons of the small business failure is incompetence of its manager (ruler, owner), as, although, external economic factors influence on all companies presented on the market, still some of them are succeed to survive while others are not.

Another conclusion can be made concerning the specific character of the business-to-customer in the Internet. Convenience always goes before functionality. As today Mint is popular and prosperous company as distinct from the Wesabe.

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