Economic subjects | Undertaking knowledge » Entrepreneurial Failure, Note

Source: http://www.doksinet Entrepreneurship  &  Management  of  SMEs,  Summary  Chapter  10,  A.PL  Kadiri   E N T R E P R E N E U R I A L   F A I L U R E   Entrepreneurial  attitude  –  the  population’s  perceptions  of  entrepreneurs,  opportunities  and  the  risk  of   failure     WHAT  IS  BUSINESS  FAILURE?   Success  and  failure  have  always  played  an  important  part  in  human  trading  activities   Little  research  has  focused  on  the  causes  and  consequences  of  business  failure   There  is  no  definitive  reason  for  business  or  entrepreneurial  failure     ‘Entrepreneurial  failure’  and  ‘business  failure’  have  been  used  synonymously     o   Current  ownership  cannot  continue  to

 operate  the  firm     •   Positive  side:  entrepreneur’s  ability  to  learn  from  it     •   US:  fear  of  failure  has  risen  à  ageing  population  is  more  risk-­‐averse     o   India  &  China:  no  fear  of  failure     •   Today’s  economy  has  a  lack  of  capital  à  many  use  bootstrapping     •   •   •   •   The  inability  to  raise  or  borrow  sufficient  capital  is  evident  in  the  success  of  new  start-­‐ups,  as  well   as  the  inability  of  the  entrepreneur  to  successfully  estimate  start-­‐up  costs   LARGE  AND  SMALL  FAILURES   •   Relative  concepts  à  perceived  magnitude  due  to  one’s  own  perception  of  the

 problem     •   Small  failures  may  be  antecedents  to  a  much  larger  and  devastating  problem     o   Proactive  measures  through  timely  action  are  important     •   Cannon  &  Edmonson:  small  failures  are  early  warning  signs     •   Baumard  &  Starbuck:  the  larger  the  failure,  the  more  external  and  more  idiosyncratic   o   Large  failures  occur  slowly  over  time  à  ‘slow  growth’  leads  to  less  attention   o   Small  failures  are  indigenous  (internal  to  the  firm  and  within  its  control)   o   Large  failures  are  exogenous  (external  to  the  firm  and  beyond  its  control)     o   Firms  learned  less  from  large  failures  than  they

 did  from  small  ones     •   It  is  important  to  learn  to  fail  intelligently  à  promotes  innovation   INTERNAL  AND  EXTERNAL  FAILURES   Internal  and  external  factors  contributing  to  failure   Internal  failure  factors   External  failure  factors     •   Poor  management   •   Economy     •   Deficits  in  accounting  practices   •   Change  of  buying  patterns     •   Poor  cash  flow  management   •   Decreased  purchasing  power  of  consumers   •   Inappropriate  sources  of  finance   •   Shortage  of  raw  materials   •   Dependency  on  customers/suppliers   •   Customers’  strikes   •   Impending  bad  debt     •   Low-­‐price  competitors   •   Overtrading   •   Catastrophic

 unpredictable  events   •   Poor  marketing  and  research   •   Environmental  protection  and  other  regulatory   requirements   •   Fraud  or  collusion   •   Bankruptcy  of  main  customer  or  supplier   •   Bankruptcy     •   Gov’t  measures  and  international  developments   Source: http://www.doksinet Entrepreneurship  &  Management  of  SMEs,  Summary  Chapter  10,  A.PL  Kadiri   •   There  is  no  agreement  on  what  exactly  ‘bad  management’  is     •   Many  external  factors  are  beyond  the  control  of  even  the  most  capable  entrepreneur   •   Some  failed  entrepreneurs  ‘save  face’  by  attributing  their  failures  to  others   o   Often  to  external  causes  à  make  use

 of  attribution  theory  (Chapter  9)   o   Blame  failures  on  exogenous  factors  and  success  on  internal  factors     •   Beaver:  primary  cause  of  business  failure  is  an  internal  problem     •   Executive  limit  –  a  limit  at  which  time  the  entrepreneur’s  ability  to  lead  the  firm  becomes   harmful   o   Coordination  and  control  problem     •   There  is  no  clear  and  definite  position  available  regarding  internal  and  external  failure     ANTECEDENTS  AND  PERCEPTIONS  OF  BUSINESS  FAILURE   •   One  must  ascertain  what  was  occurring  in  the  company  prior  to  the  event     o   Ignoring  problems,  blaming  others  etc.   •   Interview  with

 entrepreneurs:     o   ‘Not  devoting  enough  timemaybe  I  need  to  devote  myself  more  to  my  ventures’     o   ‘Small  problems  that  perhaps  will  ultimately  lead  to  failure  are  ignored  a  great  deal  of   time’     o   ‘If  we  don’t  use  the  small  failures  as  steering  mechanisms  to  change  the  vision  or   direction  of  the  company,  it  will  lead  to  catastrophic  failure’   Entrepreneurs  possess  an  ability  to  recognize  and  acknowledge  antecedents  to  failure,  yet  they  often   choose  to  the  early  warning  signs  that  these  present   ENTREPRENEURIAL  RISK     •   Failure  in  business  can  be  tied  directly  to  the  amount  of

 risk  involved  in  the  start-­‐up  or  as  the   business  grows     •   Research  has  mixed  results  for  entrepreneurs’  views  on  risk:   o   Some  say  that  entrepreneurs  have  the  ability  to  use  all  of  the  talent  at  their  disposal   à  utilize  the  best  resources  and  networks  à  minimizing  risk  (risk-­‐aversion)   o   Another  concept  of  risk  reduction  à  choosing  an  industry  with  less  volatility     o   Risk  denial  –  warning  signs  and  actions  that  are  not  believed  due  to  the  priorities  and   values  that  are  present  and  influence  the  interpretation  of  the  signs     o   Others  say  that  entrepreneurs  engage  in

 risky  behavior     o   Aversion  to  risk  is  much  lower  for  individuals  who  are  self-­‐employed  and  more  highly   educated  (inventors  also  have  a  low  risk  aversion)   o   Entrepreneurs  have  two  diverse  views  on  risk:   1.   Viewing  risk  based  on  the  variability  of  the  returns  an  entrepreneur  would   expect  from  a  new  venture     2.   ‘If  this  fails  how  much  do  I  stand  to  lose?     •   Everyone  will  perceive  an  identical  risk  in  differing  ways     •   Numerous  characteristics  of  an  individual  entrepreneur  (age,  family  etc.)  are  indicated  as  factors   that  influence  the  risk  propensity       Source: http://www.doksinet

Entrepreneurship  &  Management  of  SMEs,  Summary  Chapter  10,  A.PL  Kadiri   LIQUIDATION  OR  BANKRUPTCY     •   Bankruptcy  or  liquidation  is  one  of  the  paths  to  failure  or  dissolution  of  a  firm     •   Insolvency  –  the  inability  to  pay  one’s  debt  due  to  a  lack  of  assets     •   US:  controversy  over  the  reporting  of  the  frequency  of  small  business  bankruptcies  à  they   have  been  plummeting  à  entrepreneur-­‐friendly  bankruptcy  law     o   Thousand  of  business  bankruptcies  began  to  be  classified  as  non-­‐business   bankruptcies  à  flawed  record-­‐keeping  creates  overconfidence  and  a  lack  of  caution   FEAR  OF

 FAILURE  OR  COMPARATIVE  OPTIMISM   •   Comparative  optimism  –  the  tendency  of  people  to  report  that  they  are  less  likely  than  others   to  experience  negative  events,  and  more  likely  than  others  to  experience  positive  events     o   Overconfidence  +  lack  of  perception   •   Entrepreneurs  want  to  continue  to  build  new  firms  and  all  seem  to  be  confident  in  their  ability   to  do  just  that     EXIT  STRATEGIES   •   ‘Failure  may  lead  to  ultimate  success  in  business  by  economizing  on  resources  which  leads  to   greater  efficiencies’     o   Exit  strategy  to  maximize  those  efficiencies     •   Closures  are  sometimes  mistakenly

 thought  to  be  failures   •   Business-­‐owners  have  been  to  time  their  departure  from  businesses  when  the  economy  is  on   an  upswing  à  in  times  of  positively  increasing  economic  activity,  there  will  be  an  increase  in   business  failures     •   It  is  important  for  entrepreneurs  to  design  exit  strategies  that  will  allow  them  the  flexibility  to   stop  operations  without  losses     o   By  utilizing  an  effective  exit  strategy,  one  can  turn  the  perceived  negative  event  into  a   positive  one     •   All  firms  will  eventually  close  for  one  reason  or  another  (failure,  closure,  sell-­‐out,  bankruptcy)   Important  parts  of

 designing  and  creating  a  successful  firm  is  to  also  design  a  workable  exit  strategy  at   the  beginning  of  the  start-­‐up  process