233 Business FailureAS Edexcel New Specification 2015 Business

By Mrs Hilton for

From the specification

a) Internal and external causes of business failure:

financial factorsnon-financial factors

Guidance from Edexcel

Lesson Objectives

• To be able to discuss the internal and external causes of business failure

Starter – what does this data mean?

A Few of the UK high street names that have

gone into administration (bust)

Why did these businesses

fail?

Online competition,

over expansion, poor sales

forecasting, amongst the

reasons

In each example

many workers lost their

jobs

FINANCIAL FACTORS

Financial reasons for failure

• Poor cash flow management• Lack of funds to pay tax bill• Lack of capital which leads to

excessive borrowing• Borrowing from expensive

sources e.g. credit card or overdraft (small business)

• Watch an animation video here

Reason for failure: Poor working capital management (internal)

• Management of working capital is critical if a business is to survive

• Working capital performance is a measure of efficiency that compares a businesses’ assets to its liabilities

• Inability to manage cashflow is the most common reason businesses fail. Many profitable and seemingly successful businesses have gone ‘belly-up’ because they haven’t had enough cash to pay their bills on demand.

• Video memories from customers here

Read here about the demise of Woolworths from the high street – due

to its tie with a wholesale DVD distribution company EUK that was

cash hungry. It paid it suppliers in 30 days but its customers paid in 60 days.

The more it sold the more cash it needed.

NON-FINANCIAL FACTORS

Reason for failure: poor marketing (internal)

• Funny marketing fails - see website here

• Sunny delight originally marketed as a heathy drink for kids, it was placed next to orange juice but was a totally artificial product

• The ad agency called it “an own goal”

Judge for yourself watch the video of

the advert here

Reason for failure: Failure to innovate (internal)

• Kodak the camera film producers knew that digital was coming, they even marketed that they were going digital – watch the video here

• But failed to move fast enough into the digital world and didn’t recognise it as a disruptive technology

• Those who wanted to innovate were too low down the hierarchy and were not listened to

• With 90% of the roll film market KoOdak had become a complacent monopolist

Reason for failure: Strong £pound (external)

• Strong pound means that manufacturing businesses who heavily export will be affected

• It means their goods and products that they manufacture will cost their customers more

• Some businesses shift production overseas to counter this effect but not all can afford to do this

• Video article here from BBC on effect of strong £pound from 2012

Reason for failure: Intense competition (external)

• Uber the taxi hailing app that is only six years old is competition in London against the traditional black cab system

• See BBC article here• Uber ad here• How Uber works video

here

Which do you think will be fastest, black cab, mini cab or uber?

Reason for failure: Civil unrest (external)

• In 2011 Mark Duggan was killed in Tottenham, London, on Thursday 4 August after police stopped the car in which he was a passenger.

• A protest march sparked unrest and by the end of the night Tottenham was ablaze, with cars and shops set on fire and looters running free

• The map shows the locations of the riots on the Monday

• BBC video map here

Reason for failure: Government policies (external)

• Jan 2011 the UK government changed the top rate of VAT from 15% to 20% video here– Makes products more expensive for consumers– Consumers stop spending or may put off a larger purchase– Helped to raise £13 billion for the government to pay off the

deficit– Either the rise is passed on to the consumer or the business

will have to make less profit– May have been behind so many businesses going into

administration in 2013 / 2014; HMV, East, MEXX, Athena, La Senza, Tie rack and Zavvi to name a few

Reason for failure: Natural disasters (external)

• March 11 2011 an earthquake struck Japan, started a 23 foot tsunami, the parts factory for Toyota was located there and the UK production all but stopped due to lack of parts

• Article from bbc here• And here

Case study Modelzone• Modelzone was started by David Mordecai in

1987 in Brighton, he was also a Chief exec of Harpers Bazar

• In 2013 Modelzone closed leaving £9million of debt unpaid to Lloyds bank

• 47 stores closed and 387 workers lost their jobs• This was due to an aggressive and disastrous

expansion plan • The store opened 15 new shops between 2010

and 2012 but did not have the sales to sustain it as online trade was taking the business

• Reason for failure – unrealistic sales forecasts lead to over expansion

Case study Blockbuster• Blockbuster was a “bricks and mortar” video

rental service that went into administration in 2013

• Netflix started operating a postal rental service in 1997 that was a subscription service, no late fees. Netflix then moved into digital downloads

• Blockbuster in response cut its late fees which was a significant part of its revenue, and moved into being a convenience store with DVD rental

• Netflix was “disruptive innovation” in that when one service is invented it destroys another

• Blockbuster failed to see that a niche idea was going to go global and become a $2.8 billion dollar a year industry

• Reason for failure – refusing to move with the times in a dynamic market

Sample questions

There are no sample questions for this topic – however this is a subject which is expected to be known as the information will be useful in other questions.

Revision Video

Glossary

• Business failure; The end of trading for a business

• Financial failure; The end of trading due to mismanagement of the business finances

• Non-financial failure; The end of trading due to a factor beyond the finances of the business