Seven deadly factors associated with technology company failure.

AuthorSalazar, Andres C.

1. DEFINITION OF BUSINESS FAILURE

There are many forms of terminating a business some of which are planned and expected, eg., terminations associated with seasonal products and services or services provided during an emergency or for a limited term, etc. However, the unplanned failure (or death) of a business can result in one or more "modes" or outcomes--dissolution, liquidation, bankruptcy, or target of an acquisition. Any one of these outcomes is equated to firm failure and not normal business termination. All these outcomes are actually unplanned to a degree since most businesses, especially those based on exploitation of technology, have every intention of being successful and making lots of money for their investors for an indefinite period of time. In the case where a company never enters a stage of insolvency and is acquired by a larger company, most investors will concede that such acquisition is simply a perfectly acceptable "exit strategy" and few, if any, will admit to a business "failure" since their investment is "whole" and has an opportunity for growth under the new structure. However, strictly speaking, such an unplanned exit is rarely part of a business plan when the initial investments were made and the above definition of firm failure applies.

Failure of a business inevitably brings about one or more undesirable effects--personnel layoffs or involuntary terminations, non-payment or delays of payment of debts, legal actions against the firm, hardship for customers requesting products or services (or in the worst case, loss of customers), predatory practices by competitors, poor management experience for executives, asset seizures by secured creditors, eviction notices by landlords and irate investors and shareholders. Hence, the number of and enormously negative effects of business failure provide motivation for managers to avoid such a calamity. (Salazar, 2006)

What usually brings about business death is the stage of insolvency or the threat of insolvency, defined in the accounting sense--the inability to pay actual, anticipated or perceived debts in a timely manner given the value of immediately liquid assets plus the value of any other assets that can be transformed into liquid assets in a short time frame, usually 90 days or less. Failure of the firm occurs when the actual unplanned outcome occurs--liquidation, asset or company sale or merger.

2. SEVEN DEADLY FACTORS OF BUSINESS FAILURE

Literature that relates to business failure has been surveyed and while no pretense is made that the research is exhaustive in the classification of factors that lead to unplanned business cessation, it is believed that the seven factors described herein are major ones. Certainly a company suffering the consequences of just one factor is at risk of failure so each factor described is deadly enough to cause business failure. Classifying each factor as internal or external can be difficult since there is sometimes interaction between external and internal forces associated with each factor. Financing a company, for example, depends on both the internal need for cash infusion and the external availability of capital.

2.1 Factor 1--Management & Business Judgment

The number one factor leading to firm failure is associated with managerial errors in either operational judgment or strategy or the lack of experience and this ranking coincides with findings in a number of publications. (Salazar, 2006) The theme of Swiercz and Lydon (2002) is that the "critical factor in the long-term success of a new venture is the personal leadership ability of the entrepreneurial CEO." Birley and Nikitari (1996) cite managerial inflexibility or autocratic...

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