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Business Failures

Posted on November 13 by

The media has been covering the failure of SEARS CANADA, which filed for protection in June, and Toys R Us, which recently filed for chapter 11 bankruptcy with a $3.1-billion financing package. That was the largest ever for a retailer. Most experts agree that  the changing preferences and shopping habits of consumers are behind these large business failures, and there is no doubt that online shopping and reduced traffic to traditional shopping malls have something to do with challenges  most retailers now face.

But there is a difference between large business failure and small business failure. Small businesses fail because they run out of cash. Operators try to extend the life of the underperforming business by borrowing to keep the business alive, rather than address the real reasons. But eventually they run out of options. Usually, operators put their own money in first, then supplement that by borrowing from family members and friends. Then they go to banks, and may stretch payments to suppliers and vendors until one day no one is ready to lend. With no cash to pay its obligations, the business has no option but fold.

While running out of cash is the direct cause of failure, the underlying reasons are many: unprofitable operations, low prices, lack of sales, excess cost, and customers going elsewhere. In other words, operators fail to update their business model and hope that the change in market dynamics is temporary. By the time they realize that the change was not provisional, but permanent, it is too late.

For large businesses, the fundamental cause is a board that fell asleep at the wheel. This is usually the case when a board is too "accommodating and/or cosy" with the CEO and the senior team. Board members forget that their primary fiduciary responsibility is to represent the shareholders and protect their interest. I say this because large corporations usually have all the ingredients for success, or can get them. Take SEARS, for example. The company had a strong brand name, a reputation for providing value, a wide offering of products supplemented by a full range of home services, excellent locations from coast to coast, in addition to the ability to obtain financing and recruit the best talent. Yet, it still failed. Why? Because the board was asleep and did not hold the CEO and senior management team accountable for poor performance.

The downward trend did not happen overnight. The consistent, steady downward trend extended over years, so the failure is no surprise. It is one thing to be overtaken by a Ferrari doing 250 KM per hour. It is another to be overtaken by a freight train going 70 KM per hour. When you see sales decline, customers traffic down, margins squeezed, market share deteriorating, more negative months and consistent sub-performing quarters, it does not take a lot to know that something is not working and there is a problem.

The fundamental challenge with retailers is not only AMAZON. It is a failure to update their business model and move with the times. There are opportunities hidden in every change to market dynamics, but the key is to stay alert, have a positive attitude, and be willing to update and re-invent your business model. It takes smartness to stay close to the customer and listen. Unfortunately, growing businesses lose their customer focus when they reach a certain size. They lose their innovation and start to take their customer for granted. They start to get "puffed-up" with an attitude that they know it all. Large size does not provide immunity from failure. In my book Maverick Leadership I talk about symptoms and direction in business. How IBM missed the PC revolution. How Microsoft missed the search-engine opportunity. How companies like Xerox and Kodak did not respond properly to changes happening in their markets.

AMAZON has predominantly online expertise and resources. Traditional retailers can have online, as well as brick- and-mortar stores. A change of attitude is what is needed – an attitude of embracing changing customer preferences and changing customer habits. Instead of staying behind an outdated and obsolete recipe, they should offer a new and attractive shopping experience both online and in-store. Not one or the other, but both.

A good example of a retailer that has adopted a successful business model is Williams-Sonoma. This retailer generates almost a 50/50 sales mix from e-commerce and store sales. The company relies on state-of-the-art customer information to stay focused on its customers and has been successfully implementing a multi-brand, multi-channel strategy that is vertically integrated and that also aims to offer the best in-class retailer experience. Williams-Sonoma shows healthy growth in sales, profitability and market valuation, while also paying a good dividend.

Today's consumer is looking for good value online and in-store, so smart retailers give customers a reason to return to their online store and their physical store. This might be a pleasant shopping experience with an attractive store that has properly displayed merchandise, bright lighting, wide isles, clear signage, relaxing music, friendly and knowledgeable staff, and honest pricing. And also clean washrooms and fitting rooms, not to mention a safe and available parking. Is this rocket science?

Leonard Messi, the star striker of Barcelona Football Club, earns more than $54 million a year for the simple reason that his performance on the soccer field justifies his pay. What performance, you ask? His soccer performance is what the fans see, but his business performance is what the shareholders see. He earns every penny he makes because FC Barcelona is valued by Deloitte at $3.2 billion and is ranked by Forbes as the third most valuable sports team in the world.

Whether you run a small or large business, here are 4 key points:

1) Senior Managers must keep in touch with the front line, making decisions that are hands-on and avoid making decisions from the comfort of the boardroom.

2) Never take customers for granted. Big or small, aim to wow your customer at every opportunity and install a DNA of customer focus throughout all ranks of your company from the parking attendant to the CEO.

3) Revisit and constantly update your business model. Be vigilant, cautious, watchful, on your guard, attentive, alert...and change tactics with the market changes. Don't resist change. Plenty of opportunities reside in the market changes.

4) Always watch your business direction. Are you heading in the right direction? Speed is influenced by many things, but watch for the direction; speed can come later on. Don't persist in the wrong direction. Ask for directions and make a U-turn.

Hugh Latif, of Hugh Latif & Associates in Vaughan, Ontario is a management consultant who helps mid-size, private companies with strategy, succession, advisory boards and HR. He is author of a new book, Maverick Leadership; available from hughlatif.com and amazon.com/ca and Kindle.

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