Description
Since new firms create new jobs, open up opportunities for upward social mobility, foster economic flexibility, and reinforce competition and economic efficiency (Liao et al. 2008).
RESEARCH Open Access
Business failure factors in Iranian SMEs: Do
successful and unsuccessful entrepreneurs have
different viewpoints?
Zahra Arasti
*
, Fahimeh Zandi and Neda Bahmani
* Correspondence: [email protected]
University of Tehran, Tehran, Iran
Abstract
Small and medium Enterprises (SMEs) play a key role to innovation, employment, and
competitive advantage. One of the requirements for growth, creativity as well as
entrepreneurship in societies is to study their failure process. The purpose of this survey
study was to investigate factors which affect business failure from successful versus
unsuccessful entrepreneurs’ points of view. Our sample includes 120 entrepreneurs in
newly established small businesses who work in Iranian industry sector. Data was
gathered through questioners around general themes of “immediate environment”,
“general environment”, “manager/entrepreneur”, and “corporate policy”. Our findings
show a significant difference between successful and unsuccessful entrepreneurs’
viewpoints and also prioritize the business failure factors.
Keywords: Entrepreneurship; Business failure factors; Successful versus unsuccessful
entrepreneurs; Iran
Background
Since new firms create new jobs, open up opportunities for upward social mobility,
foster economic flexibility, and reinforce competition and economic efficiency
(Liao et al. 2008), they are considered critical for economic growth. Entrepreneurship
literature has paid much attention to factors which affect business performance.
Performance is defined by Laitinen (2002, p.66) as “the ability of an object to produce
results in a dimension determined a priori, in relation to a target”. The performance
factors based on the literature are as followed: personality of the entrepreneur
(Bouchikhi 1993), innovation, planning, and entrepreneurial culture (Georgellis et al.
2000).
Business discontinuation is an important element of dynamic economies; on the
other hand, entries to and exits from businesses are closely correlated. It has been
widely recognized that business growth as well as survival depend both on external
and internal factors. While most business challenge may be foreseeable, some will be
completely unpredictable. In order to succeed in their business, a management team
must pay careful attention to all those aspects which may have a significant impact on
business viability and also demonstrate skills both in exploiting the opportunities as
well as reducing the threats (FEE 2004). The challenges of managing a successful busi-
ness today are more complex and difficult than any other time in the recent history.
© 2014 Arasti et al. licensee Springer. This is an Open Access article distributed under the terms of the Creative Commons Attribution
License (http://creativecommons.org/licenses/by/2.0), which permits unrestricted use, distribution, and reproduction in any medium,
provided the original work is properly credited.
Arasti et al. Journal of Global Entrepreneurship Research 2014, 4:10
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Technological, product, and manufacturing innovations, changes in business regula-
tions and increased international competition have placed tremendous pressures on the
management of companies. As a consequence, the failure rates of new start-ups, and
even young companies beyond the starting phase, are at an all-time high (Bruno et al.
1987).
As Ghobadian and Gallear (1996) referred to SMEs as “the life blood of modern
economies”, they play a predominant role in fostering income stability, growth, and
employment. In addition, the importance of SMEs for economic development has long
been widely identified within the major world economies. SMEs are more responsive to
market demands than the larger companies and in particular, they broadly contribute
to job creation in developed economies. However, irrespective of the country in which
they exist, SMEs face common obstacles that weaken both their performance and
survival rate. Moreover, despite specific strengths such as flexibility and adaptability,
they have to confront a series of difficulties and disadvantages comparing to larger
companies. These weaknesses demand special policy responses. Research findings
suggest that the failure rate of small businesses within the first five years is more than
50% (Reiss 2006). Timmons and Spinelli (1994) also confirmed that over 20% of new
ventures fail within one year, and 66% fail within the first six years. As the literature
highlights very high percentage of failure rates for SMEs, it is meaningful to investigate
the causes of poor performance and failure of these firms. According to Storey (1994),
the failure of SMEs is a vital area to conduct research on, and no policy can be
formulated for SMEs without the proper understanding of the causes for business
defects. This understanding leads to an identification of the major problems which are
assumed to discourage SMEs’ performance. A robust body of research has been done
about success and growth factors of new firms (e.g. Barber et al. 1989; Audretsch 1995;
Audretsch & Mahmood 1995; Gatewood et al. 1995; Almus & Nerlinger 1999;
van Praag 2003; Kakati 2003). In contrast, little has been done to examine under-
performance factors of newly established SMEs.
Despite the great significance of understanding business failure factors, limited but
growing knowledge base, especially on small-business domain, can be found in the
literature. Furthermore, the available articles in this domain are scattered across various
fields such as business, management, finance, psychology, and entrepreneurship; and
no proof could be found that these investigations have ever been comprehensively
reviewed. Most studies have focused on prediction of failure through applying financial
models; but the focus of this paper is on causes of business failure. Therefore, the
present study seeks to answer to this question that: do successful and unsuccessful
entrepreneurs have different viewpoints on business failure factors?
The structure of the paper is as follows. “The theoretical framework” section con-
ducts a theoretical overview about exploring business failure factors based on
successful and unsuccessful entrepreneur’s viewpoints. “Methods” section is based on
quantitative research approach and uses questionnaires to explore business failure
factors. “Results” section expresses the exploratory findings, paying special attention to
failure factors based on successful and unsuccessful entrepreneur’s viewpoints, and also
prioritizes the identified factors. Finally, “Discussion and Conclusion” section concludes
and puts forward suggestions for SME owners, supporting institutions, and researchers,
and presents some limitations of the study.
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The theoretical framework
Business failure
In general, many different terminologies are related to business failure, such as firm closure,
entrepreneurial exit, dissolution, discontinuance, insolvency, organizational mortality, and
bankruptcy (Cardozo & Borchert 2004). Typically, entrepreneurial failure is defined as the
cease of an operation for financial reasons, but one type of entrepreneurial failure is the
discontinuance of venturing efforts by entrepreneurs (Liao et al. 2008). In particular,
definitions of business “disappearance”, “closure”, “exit”, and “failure” are confusing and often
overlapping (Cardozo & Borchert 2004; Stokes & Blackburn 2002). Nonetheless, a failed
business is the one which have to sell or liquidate in order to avoid losses or pay off the
creditors, or the one which is unable to make a profitable go of the business (Gaskill et al.
1993). Pretorius (2009) reviewed the business failure definitions, and suggested a universal
definition for the failure phenomenon: “a venture fails when it involuntarily becomes unable
to attract new debt or equity funding to reverse decline; consequently, it cannot continue to
operate under the current ownership and management” (Pretorius 2009).
Causes of business failure
The failure literature reveals a large number of failure prediction models which are generally
based on financial indications (Beynon & Peel 2001; Dimitras et al. 1999; Ooghe et al. 1995;
Pompe & Bilderbeek 2005). More analysis on basic causes of business failure is needed to
be done in the literature. Publications concerning causes of failure, on the other hand,
generally examine only a limited number of non-financial causes or focus on specific types
of enterprises, such as small ones (e.g. Back 2005; Everett & Watson 1998) or established
companies (e.g. Charan et al. 2002; Hambrick & D’ Aveni 1992; Sheppard 1995).
Various causes for business failure may originate either from the external environment or
from factors internal to the business. While some external causes are not so predictable,
internal causes of business failure could in many cases be forecasted in advance. In most
cases, a complex mixture of causes contribute to business failure; it is very rare for one
single factor to be involved (FEE 2004). According to the literature, the variables that
explain firm failure can be grouped into four broad categories: (1) firm specific, (2) industry
specific, (3) macro-economic, and (4) spatial or geographic factors (Maoh & Kanaroglou
2007). Ooghe and De Prijcker (2008), classified causes of bankruptcy into four groups of
factors: general environment (economics, technology, foreign countries, politics, and social
factors), immediate environment (customers, suppliers, competitors, banks and credit
institutions, stockholders, and misadventure), manager/entrepreneur (motivation, qualities,
skills, and characteristics) and corporate strategy (strategy and investments, operations,
personnel, and administration).
A number of deficiencies in many types of business environment might lead to the
failure of a business. Obstacles coming often from different types of business environment
occur simultaneously, sequentially, coincidently, and unpredictably (Oparanma et al.
2010). Factors such as lack of financial resources (Van Auken & Manning 1993; Everet
and Watson 1998; Ooghe and De Prijcker 2008; Bosma et al. 2009; Liao et al. 2008; Wu
2010), inadequate economic circumstances (Berryman 1983; Burns 2001; Liao 2004;
Ooghe & De Prijcker 2008), and government policies (FEE 2004; Oparanma et al. 2010)
have been mentioned by previous studies. According to Oparanma et al. (2010), external
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factors such as poor economic conditions and inadequate infrastructure were the most
crucial factors. Wu (2010) also discussed that the health of a firm in a highly competitive
business environment is dependent upon its capability of achieving profit and financial
solvency.
One of the most important barriers to SMEs’ survival and development seems to be the
lack of institutional support, along with inadequate legislation and excessive regulations.
Many SME managers complain about the bureaucratic processes that come along with
these obstacles; furthermore, they find many services inadequate. Gallup Organization
(2007) emphasizes that nearly half of the SMEs in EU consider themselves as operating in
an over-regulated environment and detect administrative regulations as the most import-
ant business constraint. What aggravates this situation is the scarce awareness, absence of
information and time to take advantage of existing support. In addition, Ghobadian and
Gallear (1996) refer that SMEs are usually doubtful of outside help. Some other studies fo-
cused more on the economy, such that may involve extraordinary or unusual events hap-
pening in the region or the country where the SME operates; events over which the
business has no influence, indicated as change of buying patterns, decreasing purchasing
power of customers, shortage of raw materials, customers strikes, low price competitors,
and substitution products (FEE 2004).
One of the most important problems for businesses to cope with is liquidity constraints.
Financial capital is convertible into other types of resources and it is considered the most
general resource and also the basis for other resources (Dollinger 1999). Obtaining equity
and debt financing seem to be two of the major difficulties which SMEs face because they
impose severe restrictions on their development (Storey 1994; Winborg and Landström
2001; Brown et al. 2005). The constraints on financial capital and lack of innovative
activities severely affect SME competitiveness. At the industry level, several studies, for
example those of Audretsch and Mahmood (1995), Wagner (1994), and Mata and
Portugal (1994), point out the main determinants of competitiveness and survival.
Up to 55% of all respondents in Global Entrepreneurship Monitor (GEM) report stated
financial problems as the primary reason for quitting their business. Financial problems
were cited more often by respondents in the factor-driven and efficiency-driven
economies (just over 50%) than in the innovation-driven countries (just over 40%) (Bosma
et al. 2009).
The majority of studies in business failure have focused on business rather than the
owner of the business, while the entrepreneurs and the related factors are the most
important factors in entrepreneurial process. The cases which have mostly attracted the
attention of researchers are causes of business failure, patterns for failure prediction, and
strategy for weak businesses, while the events occurred for company and its owner
and manager were reviewed less than once (Stokes and Blackburn 2002). Managerial
experience and financial management team are vital in determining the success or failure
of a firm; a survey studying the causes of firm bankruptcy in Canada found that almost
half of the firms in Canada go bankrupt due to internal problems caused by managerial
inexperience and lack of knowledge and vision (Baldwin et al. 2000). Management’s
motivation, qualities, and skills have an impact on the way a company is (mis)managed.
The majority of previous studies on business failure have confirmed the effect of “lack of
management skills” as the most important factor (Berryman 1983; Gaskill et al. 1993;
Baldwin et al. 2000; Kazooba 2006; Ooghe & De Prijcker 2008). Insufficient and
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inappropriate skills of management could cause failure in a lot of companies. Expertise in
only limited areas and unwillingness of managers to accept professional advice, reduce
possibilities of the company’s chances to survive in the medium term (Ooghe &
De Prijcker 2008). Some other studies focused more on the managerial causes of failure,
categorized them simply as poor management (FEE 2004), and concluded that this,
combined with the personality traits of the owner-manager and external factors, cause
business failure (Berryman 1983). Earliest empirical studies on business failure, examined
the role of various owners and firm characteristics to explain business failures. Many
aspects of poor management are reported to be connected with several related issues,
such as poor financial circumstances, inadequate accounting records, limited access
to necessary information, and lack of good managerial advice (Gaskill et al. 1993).
Management qualities and skills are not the only factors affecting the survival chances of
a company. It is remarkable how many personal characteristics strongly affect the
performance of a company (Ooghe and De Prijcker 2008). The numerous characteristics
shared by failed firms, are directly related to personal decision-based characteristics of the
owner, including lack of insight, inflexibility, emphasis on technical skills, etc. (Gaskill
et al. 1993). Managers and entrepreneurs are obliged to anticipate and adjust their
decisions to the changes and opportunities in the environment. Optimism and risk
behavior are other possible causes of declining performance. Previous research indicates
that entrepreneurs are somewhat more inclined to take risks than managers; this
difference is stressed even more when the entrepreneur has the goal of a significant
venture growth. Many over-optimistic (young) entrepreneurs are faced with problems
to attract external finance from banks. Moreover, a higher inherent risk aversion of
management and changes in the value of tax shields and future bankruptcy costs also
make relatively safe projects more desirable (Ooghe and De Prijcker 2008).
Business failure in Iranian context
In order to know more about the business environment of Iran, we address the annual
report of World Bank in 2011. Doing Business 2011 is an annual report investigating the
regulations that enhance business activity and those that constrain it. Doing Business
presents quantitative indicators on business regulations and the protection of property
rights that can be compared across 183 economies over time. Regulations affecting 11
areas of the life of a business are covered: starting a business, dealing with construction
permits, registering property, obtaining credit, protecting investors, paying taxes, trading
across borders, enforcing contracts, closing a business, getting electricity, and employing
workers. Iran with 76.4 million populations and GNI per capita US$ 7.211, is placed 152
among 189 countries, in the “ease of doing business”. The rank of Iran in “starting a
business” is 107, while in “obtaining credit”, it is ranked 86. We must mention that the
Islamic Republic of Iran eased the creation of business start-ups in 2011 by installing a
web portal allowing entrepreneurs to search for and reserve a unique company name;
furthermore, the establishment of a new private credit bureau improved access to credit
information. The Islamic Republic of Iran made enforcing contracts easier and faster by
introducing electronic filing of some documents, text message notification, and an
electronic case management system (World Bank 2013). Also, raking of Iran in Middle
East and North Africa is 8
th
from 19 countries (World Bank 2013), while according to the
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annual report of GEM, the business discontinuation rate in Iran (5%) is almost lower than
average of efficiency–driven economies (6%) (Xavier et al. 2013).
Based on a research done on causes of business failure in Iranian context, main causes
of business failures are respectively: 1) management deficiency, 2) non-financial support
from banks and financial institutions, 3) inadequate economic circumstances and 4)
government policies (Arasti 2011).
These results show that entrepreneurship is not encouraged in Iranian context and the
effect of external factors is more severe.
Another study on individual factors influencing business failure in Iranian context
demonstrates that individual factors affecting failure in newly established small businesses
include crisis management skills, management skills (i.e. marketing, financial and human
resource and team management skills), change of motivations over time, have a traditional
look in business, insist on mistake and lack of capabilities (i.e. time, knowledge and
experience) (Arasti et al. 2012).
As noted in the literature, previous studies identified different factors influencing
business failure, but no study explores these factors based on successful and unsuccessful
entrepreneur’s viewpoints. This is the first study trying to answer the following question:
Do successful and unsuccessful entrepreneurs have different viewpoints on business
failure factors?
Methods
This is a survey study on a sample of newly established small businesses with less than 50
employees (based on Iranians Ministry of industries, commerce and mines definition of small
business) and less than 3 years old (based on GEM’s definition of new established businesses)
(Bosma et al. 2009) all are located in Eshtehard
a
industrial sector. This sample consisted of
52 unsuccessful entrepreneurs (owner of failed businesses) and 53 successful entrepreneurs.
An unsuccessful entrepreneur is the owner of a failed business. Based on Pretorius (2009)
definition, a venture fails when it cannot continue to operate under the current ownership
and management. A successful entrepreneur is a business owner who succeeds to overcome
different challenges and problems and still can survive in difficult situation.
Data was gathered by questionnaires based on Ooghe and De Prijcker’s (2008) model (in
five-point Likert) which ask questions around four elements including: general environment,
immediate environment, manager/entrepreneur, and corporate policy. This model has been
improved in a qualitative study in Iranian context by semi structured interviews of 12 failed
business owners in industry sector (Zandi 2012). Table 1 describes the variables.
In total, 120 questionnaires were personally distributed from which 105 filled
questionnaires were returned. The validity of the questionnaire used in this study was
guaranteed by previous studies and experts’ opinions which have done a few alterations as
well as a pretest. Reliability was measured by Cronbach’s alpha which was 0.73 for the whole
questionnaire.
Data analysis was done on 105 completely filled questionnaires by SPSS. According to
central limit theorem, regarding high sample size, sample mean have normal distribution so
we can use t-test. So, two independent sample t-test was used to analyze the differences in
viewpoints of successful versus unsuccessful entrepreneurs. Friedman test was also used to
compare mean ranking of two groups of entrepreneurs.
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Table 1 Description of variables
Dimensions Components Concepts
Individual Lack of motivations Change of motivation over time
Lack of motivation for continuation of the job
Disappointment in the business
Lack of skills Lack of management skills
Lack of marketing skills
Lack of crisis management skills
Lack of capabilities Lack of proper education
Lack of proper time spent for the business
Lack of proper knowledge and experience
Inappropriate characteristics Have a traditional look at the business
Family problems psychological pressures
Over confidence on others
Insist on mistake and continue the job
Immediate
environment
Customers issues Single customer
Financial problems of customers
Focus of customer on price rather than quality
Suppliers issues Difficulty to access suppliers
Single supplier
Intensity of competition Lack of flexibility in the competition
Import of similar products
International competitors and high quality of their products
Poor performance of banks and
credit institutions
Poor performance of credit in industry sector
High interest rate
Lack of access to loan at the proper time
Untrustable bank advisers
Misadventure Diseases, Dead
General
environment
Inappropriate economics situation Unstable and turbulent economic environment
Embargo
Inflation
High rate of interest
Changing technology Use of new technology
High cost of technology
Inappropriate policies Bureaucracy
Instability of rules and regulation
No guarantee and monitoring to execute the rules
Execute subsidies rule
Liberalization of prices
Lack of detailed information on business
No support to entrepreneurs
Social factors issues Lack of role models
Work of women entrepreneurs in a male dominated area
Negative view of society to entrepreneurs
Culture of rule averse in the business environment
No culture of ethical esteem in the business environment
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Results
As Table 2 shows, most of the unsuccessful respondents in our sample (85%) were between
25 and 45 years old and married. This percentage for the successful respondents was
(83.2%). 96.2% of unsuccessful respondents and 92.4% of successful respondents were male.
44.3% of unsuccessful entrepreneurs and 58% of successful entrepreneurs had university
degrees. About half of the unsuccessful business owners had experience in a related sector,
but only 30% had management experiences and 23.5% of them had previous entrepreneurial
experience. These percentages for successful entrepreneurs were 45%, 28%, and 27%
respectively. These businesses were in a different industry sector. Many of them were in
chemical industry (30.8% of unsuccessful and 35.3% of successful) as well as in mineral
nonmetal industry (21.2% of unsuccessful and 24.1% of successful). Furthermore, 50% of
these newly established small businesses failed before their second year of existence.
In order to understand the differences between successful and unsuccessful entrepreneur’s
viewpoints about business failure factors, we used two sample t-test. According to the
results in Table 3, in significance level of 90%, “corporate policy”, “manager/entrepreneur”,
and “immediate environment” are statistically significant.
Table 1 Description of variables (Continued)
Corporate
policy
Strategy and investments Poor sales model
Inadequate business financing strategy
Lack of correlation between production and marketing
strategies
Inappropriate pricing
Staff issues Lack of motivated staff
Lack of skilled staff
High cost of skilled staff
Partnership issues Dissension between partners
Exit of partner
Overconfidence in partnership
Lack of proper understanding of each other
Inappropriate task division between partners
Lack of cooperation between partners
Lack of effective communication between partners
Lack of transparency in the partnership
Lack of trust in partnerships
Lack of believe in one of partners about business success
Preference to amicable relations rather than working
relationships
Executive issues Inappropriate financial management
Improper placement of financial tools
Inaccurate market evaluation
No detailed assessment of duties and responsibilities in
business
Insufficient awareness of laws and policies and labor relations
Lack of appropriate response to problems
Inaccurate cost estimate
No evaluate the status of competitors
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Table 2 Sample description
Successful (n = 53) Unsuccessful (n = 52)
Personal variable
Age
Under 25 years old 10.3 6.8
Between 25 and 45 years old 83.5 85
More than 45 years old 6.2 8.2
Gender
Male 92.4 96.2
Female 7.6 3.8
Married 92.2 94.2
Level of education
Under diploma 7 10
Diploma 35 30
University degree 58 60
Previous experience
In a related sector 45 49
Management experience 28 30
Entrepreneurial experience 27 23.5
Organizational variables
Business lifetime
Less than 1 year 31 34.6
Between 1 and 2 years 26 34.6
Between 2 and 3 years 43 11.5
No response 0 19.2
Business activity
Metal industry 9.6 9.6
Mineral nonmetal industry 24.1 21.2
Alimentary industry 11.5 11.5
Electronic industry 1.6 1.9
Weaving industry 5.8 3.8
Chemical industry 35.3 30.8
Cellulose industry 10.8 5.8
No response 1.3 15.4
Table 3 Results of two sample t-test for business failure factors
Mean Std. differences T- test
Variable Succ. Unsuc. Succ. Unsuc. df sig t-Test
General environment 3.54 3.59 0.36 0.27 101 0.49 -0.685
Immediate environment 3.01 3.16 0.4 0.42 102 0.08* -1.761
Manager/Entrepreneur 2.93 3.14 0.57 0.69 102 0.1* -1.657
Corporate policy 2.98 3.13 0.37 0.49 101 0.1* -1.611
* p < 0.1.
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In addition, two sample t-test was used to show different viewpoints of entrepreneurs in
sub-items of the factors. Results in Table 4 show that in significance level of 95%,
“inappropriate policies”, “social factors issues”, “suppliers issues”, “intensity of competition”,
“misadventure”, “lack of skills”, “lack of capabilities”, “inappropriate characteristics”,
“partnership issues”, “strategy and investment”, and “staff issues” are statistically significant.
According to the results of Friedman test for successful entrepreneurs (P < 0.05,
chi-square = 72.2) and for unsuccessful entrepreneurs (P < 0.05, chi-square = 30.4),
“general environment” is the most important business failure factor (See Table 5).
Moreover, based on the results obtained from Friedman test on sub-items of business
failure factors, the four most important factors for successful entrepreneurs include
“inappropriate policies”, “inappropriate economic situation”, “lack of skills”, and “customers
issues” (P < 0.05, chi-square = 297.5), while for unsuccessful entrepreneurs these are
“inappropriate policies”, “lack of skills”, “strategy and investment”, and “inappropriate
economic situation” (P < 0.05, chi-square = 287.9) (See Table 6).
Discussion and conclusion
This study has been done to compare viewpoints of successful and unsuccessful
entrepreneurs about factors influencing business failure on a sample of 120 newly
established small businesses in industry sector.
As the results show “inappropriate policies” is the most important factor of business
failure for both successful and unsuccessful entrepreneurs. Most of respondents mentioned
the influence of policy factors on their businesses. Among these, lack of support to
entrepreneurs, instability of rules and regulation, lack of guarantee as well as monitoring to
execute the rules, and bureaucracy have more influence on business failure. The results
obtained from this study show that Iranian entrepreneurs work in an unsupportive and
Table 4 Results of two sample t-test for sub-items of business failure factors
Mean Std. differences T –test
Variable Succ. Unsuc. Succ. Unsuc. df sig t
Inappropriate economic situation 3.75 3.71 0.51 0.5 101 .69 .4
Inappropriate policies 3.75 4.01 0.5 0.42 102 .007* -2.74
Changing technology 3.15 3.48 1.11 1.19 102 .143 -1.47
Social factors issues 3.14 2.9 0.56 0.53 101 .029* 2.22
Customers issues 3.36 3.48 0.37 0.53 102 .222 -1.23
Suppliers issues 2.96 3.48 1.08 1.3 102 .032* -2.173
Intensity of competition 2.76 2.35 0.98 0.88 102 .005* 2.178
Poor performance of bank and credit 2.81 3.28 0.87 0.77 102 .141 -2.885
Misadventure 2.33 2.11 0.88 0.68 101 .001* 1.485
Lack of motivation 2.37 3.15 0.96 1.2 101 .258 -3.398
Lack of skills 3.86 3.97 0.78 0.73 102 .014* -1.138
Lack of capabilities 2.66 2.13 1.01 1.14 102 .060* 2.496
Inappropriate characteristics 2.49 2.81 0.84 0.84 102 .000* -1.904
Executive issues 3.22 3.53 0.41 0.4 102 .344 -3.831
Partnership issues 3.11 3.3 0.74 1.16 102 .002* -.953
Strategy and investment 2.96 3.71 1.03 1.2 101 .000* -3.234
Staff issues 2.4 1.86 0.74 0.7 102 .033* 3.753
*p < 0.05.
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bureaucratic environment with sometimes unstable rules which could reverse the life of
entrepreneurs. So, Iranian business environment, despite its recent efforts to change, does
not yet encourage individuals to become entrepreneurs. Inappropriate polices such as
instability of rules and regulations cause of bewilderment in investing and continuing
business for example subside rules and liberalization of price change all plane of
entrepreneurs in business especially for start-ups and new established business that
faces many challenges in early years of activity. Bureaucracy in taxation rules, business
licenses and permission of activity is also influence on entrepreneurs and makes them
disappointment; it sometimes reduces their motivation to continue their activity.
The second most important business failure factor for unsuccessful entrepreneurs and the
third one for successful entrepreneurs is “skill”. This demonstrates that the entrepreneurs
know about their weaknesses in management skills. They mentioned lack of management
skills, marketing skills, and crisis management skills in their responses. It is because of no
integration of these skills in Iranian academic education. Despite of high rate of university
graduate in Iran, entrepreneurship education is not included in the curricula in almost all
majors. Just an optional course entitled entrepreneurship was considered for some majors
in some universities. Also, an entrepreneurship course is obligatory in vocational schools.
So, Iranian graduate students are prepared for being an employee rather than an employer.
Table 5 Results of Friedman test on business failure factors
Variable Mean rank Rank
Successful Unsuccessful Successful Unsuccessful
General environment 3.72 3.4 1 1
Immediate environment 2.22 2.18 2 3
Corporate policy 2.14 2.28 3 2
Manager/entrepreneur 1.93 2.14 4 4
Table 6 Results of Friedman test on sub-items business failure factors
Mean rank Rank
Variable Succ. Unsuc. Succ. Unsuc.
Inappropriate economic situation 13.61 11.36 2 4
Inappropriate policies 13.73 13.74 1 1
Changing technology 9.3 10.57 8 7
Social factors issues 9.9 7.58 6 13
Customers issues 11.47 10.46 4 8
Suppliers issues 8.83 10.76 9 6
Intensity of competition 7.32 5.29 12 14
Poor performance of bank and credit 7.41 9.16 11 10
Misadventure 5.66 4.14 15 16
Lack of motivation 5.66 8.93 16 11
Lack of skills 13.37 13.28 3 2
Lack of capabilities 6.99 4.8 13 15
Inappropriate characteristics 6.21 7.74 14 12
Executive issues 9.4 9.42 7 9
Partnership issues 10.07 11.09 5 5
Strategy and investment 8.74 11.51 10 3
Staff issues 5.34 3.18 17 17
Arasti et al. Journal of Global Entrepreneurship Research 2014, 4:10 Page 11 of 14
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Inappropriate economic situation is one of the most important business failure factors for
both groups of successful and unsuccessful entrepreneurs. In fact, even those who can
survive in their businesses in such bad economic situation indicate the influence of unstable
and turbulent economic environment, embargo, inflation and high rate of interest.
Economic situation in Iran is not proper for entrepreneurs actually it’s reduce their
motivation. Based on Iranian national statistics center in 2014, some indexes like rate of
inflation is 32.5% and also credit repayment rate is between 18-25%. These things create
uncertainty situation to investment and return of investment.
Also, for unsuccessful entrepreneurs who experience failure in businesses, “strategy and
investment” is an important factor, while successful entrepreneurs do not emphasize on this
it. Poor sales model, inadequate business financing strategy, lack of correlation between
production and marketing strategies and inappropriate pricing are factors have been
mentioned by respondents in this regard. The importance of these factors for unsuccessful
entrepreneurs might be explained by their weakness in the field of strategy. No attention to
business strategy especially regarding business financing among start-ups has caused many
business failures in Iran.
While suppliers issues including access to suppliers and the problem of single supplier is
an important factor for unsuccessful entrepreneurs, customers issues such as the problem
of single customer, financial problems of customers and focus of customer on price rather
than quality are more important for successful ones.
Access to financial resources was not a very important issue for both of them. It is true
that both groups deal with this problem and in many cases don’t access to loan in a right
time due to business failure, and consequently they stop all business activities. However,
successful entrepreneurs who have a business strategy and appropriate investment succeed
to survive their businesses in spite of not having access to financial resources.
Also, unsuccessful entrepreneurs indicated the importance of motivation in business
failure. They mentioned changes of motivation over time, lack of motivation for
continuation of the job and disappointment in the business. It is obvious that a business
especially start-ups deals with a lot of challenges, and successful entrepreneurs are those
who are enough strong and perseverant to deal with these challenges. As the results show,
the unsuccessful entrepreneurs didn’t feel enough motivation to continue and this was an
important factor caused business failure.
This study tried to show business failure factors in a different approach. This is the first
study on business failure factors based on successful and unsuccessful entrepreneurs’
viewpoints. The different characteristics of successful and unsuccessful entrepreneurs such
as education level and previous experience were analyzed. Also, different viewpoints of
successful entrepreneurs who certainly experienced a small defeat but could come out of
them versus unsuccessful entrepreneurs who experienced total defeat, help policy makers
for better facilitation of business process and also providing the suitable entrepreneurship
education programs. Such educational programs improve business skills and reduce the
probability of business failure. Therefore, policy makers can use the results of this study to
decrease the business failure. Reduce bureaucracy help entrepreneurs to continue their
activities in a safe situation and increase their motivation to continue their businesses. Also,
this survey shows most of businesses have experienced failure in 1 or 2 years after start, so
policy makers can facilitate business creation and make the business environment more
favorable and consider incentives to motivate entrepreneurs to remain in their business.
Arasti et al. Journal of Global Entrepreneurship Research 2014, 4:10 Page 12 of 14
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Access to unsuccessful entrepreneurs was one of challenges in this study. It is because
they usually have a tendency not to restate the memories about their failure. It is suggested
that Future studies examine business failure factors with the same approach but in other
sectors. These studies could be done in order to find solutions to reduce business failure,
based on successful and unsuccessful entrepreneurs’ viewpoints. Examining the influence of
different types of end products on business failure factors would also be an interesting area
for future research.
Endnote
a
Eshtehard is a small industrial town near Tehran.
Competing interests
The authors declare that they have no competing interests.
Authors’ contributions
FZ carried out the data gathering and analysis. NB help us in data analysis and drafted the manuscript. All authors read and
approved the final manuscript.
Acknowledgments
None.
Received: 8 September 2013 Accepted: 21 May 2014
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Since new firms create new jobs, open up opportunities for upward social mobility, foster economic flexibility, and reinforce competition and economic efficiency (Liao et al. 2008).
RESEARCH Open Access
Business failure factors in Iranian SMEs: Do
successful and unsuccessful entrepreneurs have
different viewpoints?
Zahra Arasti
*
, Fahimeh Zandi and Neda Bahmani
* Correspondence: [email protected]
University of Tehran, Tehran, Iran
Abstract
Small and medium Enterprises (SMEs) play a key role to innovation, employment, and
competitive advantage. One of the requirements for growth, creativity as well as
entrepreneurship in societies is to study their failure process. The purpose of this survey
study was to investigate factors which affect business failure from successful versus
unsuccessful entrepreneurs’ points of view. Our sample includes 120 entrepreneurs in
newly established small businesses who work in Iranian industry sector. Data was
gathered through questioners around general themes of “immediate environment”,
“general environment”, “manager/entrepreneur”, and “corporate policy”. Our findings
show a significant difference between successful and unsuccessful entrepreneurs’
viewpoints and also prioritize the business failure factors.
Keywords: Entrepreneurship; Business failure factors; Successful versus unsuccessful
entrepreneurs; Iran
Background
Since new firms create new jobs, open up opportunities for upward social mobility,
foster economic flexibility, and reinforce competition and economic efficiency
(Liao et al. 2008), they are considered critical for economic growth. Entrepreneurship
literature has paid much attention to factors which affect business performance.
Performance is defined by Laitinen (2002, p.66) as “the ability of an object to produce
results in a dimension determined a priori, in relation to a target”. The performance
factors based on the literature are as followed: personality of the entrepreneur
(Bouchikhi 1993), innovation, planning, and entrepreneurial culture (Georgellis et al.
2000).
Business discontinuation is an important element of dynamic economies; on the
other hand, entries to and exits from businesses are closely correlated. It has been
widely recognized that business growth as well as survival depend both on external
and internal factors. While most business challenge may be foreseeable, some will be
completely unpredictable. In order to succeed in their business, a management team
must pay careful attention to all those aspects which may have a significant impact on
business viability and also demonstrate skills both in exploiting the opportunities as
well as reducing the threats (FEE 2004). The challenges of managing a successful busi-
ness today are more complex and difficult than any other time in the recent history.
© 2014 Arasti et al. licensee Springer. This is an Open Access article distributed under the terms of the Creative Commons Attribution
License (http://creativecommons.org/licenses/by/2.0), which permits unrestricted use, distribution, and reproduction in any medium,
provided the original work is properly credited.
Arasti et al. Journal of Global Entrepreneurship Research 2014, 4:10
http://www.journal-jger.com/content/4/1/10
Technological, product, and manufacturing innovations, changes in business regula-
tions and increased international competition have placed tremendous pressures on the
management of companies. As a consequence, the failure rates of new start-ups, and
even young companies beyond the starting phase, are at an all-time high (Bruno et al.
1987).
As Ghobadian and Gallear (1996) referred to SMEs as “the life blood of modern
economies”, they play a predominant role in fostering income stability, growth, and
employment. In addition, the importance of SMEs for economic development has long
been widely identified within the major world economies. SMEs are more responsive to
market demands than the larger companies and in particular, they broadly contribute
to job creation in developed economies. However, irrespective of the country in which
they exist, SMEs face common obstacles that weaken both their performance and
survival rate. Moreover, despite specific strengths such as flexibility and adaptability,
they have to confront a series of difficulties and disadvantages comparing to larger
companies. These weaknesses demand special policy responses. Research findings
suggest that the failure rate of small businesses within the first five years is more than
50% (Reiss 2006). Timmons and Spinelli (1994) also confirmed that over 20% of new
ventures fail within one year, and 66% fail within the first six years. As the literature
highlights very high percentage of failure rates for SMEs, it is meaningful to investigate
the causes of poor performance and failure of these firms. According to Storey (1994),
the failure of SMEs is a vital area to conduct research on, and no policy can be
formulated for SMEs without the proper understanding of the causes for business
defects. This understanding leads to an identification of the major problems which are
assumed to discourage SMEs’ performance. A robust body of research has been done
about success and growth factors of new firms (e.g. Barber et al. 1989; Audretsch 1995;
Audretsch & Mahmood 1995; Gatewood et al. 1995; Almus & Nerlinger 1999;
van Praag 2003; Kakati 2003). In contrast, little has been done to examine under-
performance factors of newly established SMEs.
Despite the great significance of understanding business failure factors, limited but
growing knowledge base, especially on small-business domain, can be found in the
literature. Furthermore, the available articles in this domain are scattered across various
fields such as business, management, finance, psychology, and entrepreneurship; and
no proof could be found that these investigations have ever been comprehensively
reviewed. Most studies have focused on prediction of failure through applying financial
models; but the focus of this paper is on causes of business failure. Therefore, the
present study seeks to answer to this question that: do successful and unsuccessful
entrepreneurs have different viewpoints on business failure factors?
The structure of the paper is as follows. “The theoretical framework” section con-
ducts a theoretical overview about exploring business failure factors based on
successful and unsuccessful entrepreneur’s viewpoints. “Methods” section is based on
quantitative research approach and uses questionnaires to explore business failure
factors. “Results” section expresses the exploratory findings, paying special attention to
failure factors based on successful and unsuccessful entrepreneur’s viewpoints, and also
prioritizes the identified factors. Finally, “Discussion and Conclusion” section concludes
and puts forward suggestions for SME owners, supporting institutions, and researchers,
and presents some limitations of the study.
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The theoretical framework
Business failure
In general, many different terminologies are related to business failure, such as firm closure,
entrepreneurial exit, dissolution, discontinuance, insolvency, organizational mortality, and
bankruptcy (Cardozo & Borchert 2004). Typically, entrepreneurial failure is defined as the
cease of an operation for financial reasons, but one type of entrepreneurial failure is the
discontinuance of venturing efforts by entrepreneurs (Liao et al. 2008). In particular,
definitions of business “disappearance”, “closure”, “exit”, and “failure” are confusing and often
overlapping (Cardozo & Borchert 2004; Stokes & Blackburn 2002). Nonetheless, a failed
business is the one which have to sell or liquidate in order to avoid losses or pay off the
creditors, or the one which is unable to make a profitable go of the business (Gaskill et al.
1993). Pretorius (2009) reviewed the business failure definitions, and suggested a universal
definition for the failure phenomenon: “a venture fails when it involuntarily becomes unable
to attract new debt or equity funding to reverse decline; consequently, it cannot continue to
operate under the current ownership and management” (Pretorius 2009).
Causes of business failure
The failure literature reveals a large number of failure prediction models which are generally
based on financial indications (Beynon & Peel 2001; Dimitras et al. 1999; Ooghe et al. 1995;
Pompe & Bilderbeek 2005). More analysis on basic causes of business failure is needed to
be done in the literature. Publications concerning causes of failure, on the other hand,
generally examine only a limited number of non-financial causes or focus on specific types
of enterprises, such as small ones (e.g. Back 2005; Everett & Watson 1998) or established
companies (e.g. Charan et al. 2002; Hambrick & D’ Aveni 1992; Sheppard 1995).
Various causes for business failure may originate either from the external environment or
from factors internal to the business. While some external causes are not so predictable,
internal causes of business failure could in many cases be forecasted in advance. In most
cases, a complex mixture of causes contribute to business failure; it is very rare for one
single factor to be involved (FEE 2004). According to the literature, the variables that
explain firm failure can be grouped into four broad categories: (1) firm specific, (2) industry
specific, (3) macro-economic, and (4) spatial or geographic factors (Maoh & Kanaroglou
2007). Ooghe and De Prijcker (2008), classified causes of bankruptcy into four groups of
factors: general environment (economics, technology, foreign countries, politics, and social
factors), immediate environment (customers, suppliers, competitors, banks and credit
institutions, stockholders, and misadventure), manager/entrepreneur (motivation, qualities,
skills, and characteristics) and corporate strategy (strategy and investments, operations,
personnel, and administration).
A number of deficiencies in many types of business environment might lead to the
failure of a business. Obstacles coming often from different types of business environment
occur simultaneously, sequentially, coincidently, and unpredictably (Oparanma et al.
2010). Factors such as lack of financial resources (Van Auken & Manning 1993; Everet
and Watson 1998; Ooghe and De Prijcker 2008; Bosma et al. 2009; Liao et al. 2008; Wu
2010), inadequate economic circumstances (Berryman 1983; Burns 2001; Liao 2004;
Ooghe & De Prijcker 2008), and government policies (FEE 2004; Oparanma et al. 2010)
have been mentioned by previous studies. According to Oparanma et al. (2010), external
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factors such as poor economic conditions and inadequate infrastructure were the most
crucial factors. Wu (2010) also discussed that the health of a firm in a highly competitive
business environment is dependent upon its capability of achieving profit and financial
solvency.
One of the most important barriers to SMEs’ survival and development seems to be the
lack of institutional support, along with inadequate legislation and excessive regulations.
Many SME managers complain about the bureaucratic processes that come along with
these obstacles; furthermore, they find many services inadequate. Gallup Organization
(2007) emphasizes that nearly half of the SMEs in EU consider themselves as operating in
an over-regulated environment and detect administrative regulations as the most import-
ant business constraint. What aggravates this situation is the scarce awareness, absence of
information and time to take advantage of existing support. In addition, Ghobadian and
Gallear (1996) refer that SMEs are usually doubtful of outside help. Some other studies fo-
cused more on the economy, such that may involve extraordinary or unusual events hap-
pening in the region or the country where the SME operates; events over which the
business has no influence, indicated as change of buying patterns, decreasing purchasing
power of customers, shortage of raw materials, customers strikes, low price competitors,
and substitution products (FEE 2004).
One of the most important problems for businesses to cope with is liquidity constraints.
Financial capital is convertible into other types of resources and it is considered the most
general resource and also the basis for other resources (Dollinger 1999). Obtaining equity
and debt financing seem to be two of the major difficulties which SMEs face because they
impose severe restrictions on their development (Storey 1994; Winborg and Landström
2001; Brown et al. 2005). The constraints on financial capital and lack of innovative
activities severely affect SME competitiveness. At the industry level, several studies, for
example those of Audretsch and Mahmood (1995), Wagner (1994), and Mata and
Portugal (1994), point out the main determinants of competitiveness and survival.
Up to 55% of all respondents in Global Entrepreneurship Monitor (GEM) report stated
financial problems as the primary reason for quitting their business. Financial problems
were cited more often by respondents in the factor-driven and efficiency-driven
economies (just over 50%) than in the innovation-driven countries (just over 40%) (Bosma
et al. 2009).
The majority of studies in business failure have focused on business rather than the
owner of the business, while the entrepreneurs and the related factors are the most
important factors in entrepreneurial process. The cases which have mostly attracted the
attention of researchers are causes of business failure, patterns for failure prediction, and
strategy for weak businesses, while the events occurred for company and its owner
and manager were reviewed less than once (Stokes and Blackburn 2002). Managerial
experience and financial management team are vital in determining the success or failure
of a firm; a survey studying the causes of firm bankruptcy in Canada found that almost
half of the firms in Canada go bankrupt due to internal problems caused by managerial
inexperience and lack of knowledge and vision (Baldwin et al. 2000). Management’s
motivation, qualities, and skills have an impact on the way a company is (mis)managed.
The majority of previous studies on business failure have confirmed the effect of “lack of
management skills” as the most important factor (Berryman 1983; Gaskill et al. 1993;
Baldwin et al. 2000; Kazooba 2006; Ooghe & De Prijcker 2008). Insufficient and
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inappropriate skills of management could cause failure in a lot of companies. Expertise in
only limited areas and unwillingness of managers to accept professional advice, reduce
possibilities of the company’s chances to survive in the medium term (Ooghe &
De Prijcker 2008). Some other studies focused more on the managerial causes of failure,
categorized them simply as poor management (FEE 2004), and concluded that this,
combined with the personality traits of the owner-manager and external factors, cause
business failure (Berryman 1983). Earliest empirical studies on business failure, examined
the role of various owners and firm characteristics to explain business failures. Many
aspects of poor management are reported to be connected with several related issues,
such as poor financial circumstances, inadequate accounting records, limited access
to necessary information, and lack of good managerial advice (Gaskill et al. 1993).
Management qualities and skills are not the only factors affecting the survival chances of
a company. It is remarkable how many personal characteristics strongly affect the
performance of a company (Ooghe and De Prijcker 2008). The numerous characteristics
shared by failed firms, are directly related to personal decision-based characteristics of the
owner, including lack of insight, inflexibility, emphasis on technical skills, etc. (Gaskill
et al. 1993). Managers and entrepreneurs are obliged to anticipate and adjust their
decisions to the changes and opportunities in the environment. Optimism and risk
behavior are other possible causes of declining performance. Previous research indicates
that entrepreneurs are somewhat more inclined to take risks than managers; this
difference is stressed even more when the entrepreneur has the goal of a significant
venture growth. Many over-optimistic (young) entrepreneurs are faced with problems
to attract external finance from banks. Moreover, a higher inherent risk aversion of
management and changes in the value of tax shields and future bankruptcy costs also
make relatively safe projects more desirable (Ooghe and De Prijcker 2008).
Business failure in Iranian context
In order to know more about the business environment of Iran, we address the annual
report of World Bank in 2011. Doing Business 2011 is an annual report investigating the
regulations that enhance business activity and those that constrain it. Doing Business
presents quantitative indicators on business regulations and the protection of property
rights that can be compared across 183 economies over time. Regulations affecting 11
areas of the life of a business are covered: starting a business, dealing with construction
permits, registering property, obtaining credit, protecting investors, paying taxes, trading
across borders, enforcing contracts, closing a business, getting electricity, and employing
workers. Iran with 76.4 million populations and GNI per capita US$ 7.211, is placed 152
among 189 countries, in the “ease of doing business”. The rank of Iran in “starting a
business” is 107, while in “obtaining credit”, it is ranked 86. We must mention that the
Islamic Republic of Iran eased the creation of business start-ups in 2011 by installing a
web portal allowing entrepreneurs to search for and reserve a unique company name;
furthermore, the establishment of a new private credit bureau improved access to credit
information. The Islamic Republic of Iran made enforcing contracts easier and faster by
introducing electronic filing of some documents, text message notification, and an
electronic case management system (World Bank 2013). Also, raking of Iran in Middle
East and North Africa is 8
th
from 19 countries (World Bank 2013), while according to the
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annual report of GEM, the business discontinuation rate in Iran (5%) is almost lower than
average of efficiency–driven economies (6%) (Xavier et al. 2013).
Based on a research done on causes of business failure in Iranian context, main causes
of business failures are respectively: 1) management deficiency, 2) non-financial support
from banks and financial institutions, 3) inadequate economic circumstances and 4)
government policies (Arasti 2011).
These results show that entrepreneurship is not encouraged in Iranian context and the
effect of external factors is more severe.
Another study on individual factors influencing business failure in Iranian context
demonstrates that individual factors affecting failure in newly established small businesses
include crisis management skills, management skills (i.e. marketing, financial and human
resource and team management skills), change of motivations over time, have a traditional
look in business, insist on mistake and lack of capabilities (i.e. time, knowledge and
experience) (Arasti et al. 2012).
As noted in the literature, previous studies identified different factors influencing
business failure, but no study explores these factors based on successful and unsuccessful
entrepreneur’s viewpoints. This is the first study trying to answer the following question:
Do successful and unsuccessful entrepreneurs have different viewpoints on business
failure factors?
Methods
This is a survey study on a sample of newly established small businesses with less than 50
employees (based on Iranians Ministry of industries, commerce and mines definition of small
business) and less than 3 years old (based on GEM’s definition of new established businesses)
(Bosma et al. 2009) all are located in Eshtehard
a
industrial sector. This sample consisted of
52 unsuccessful entrepreneurs (owner of failed businesses) and 53 successful entrepreneurs.
An unsuccessful entrepreneur is the owner of a failed business. Based on Pretorius (2009)
definition, a venture fails when it cannot continue to operate under the current ownership
and management. A successful entrepreneur is a business owner who succeeds to overcome
different challenges and problems and still can survive in difficult situation.
Data was gathered by questionnaires based on Ooghe and De Prijcker’s (2008) model (in
five-point Likert) which ask questions around four elements including: general environment,
immediate environment, manager/entrepreneur, and corporate policy. This model has been
improved in a qualitative study in Iranian context by semi structured interviews of 12 failed
business owners in industry sector (Zandi 2012). Table 1 describes the variables.
In total, 120 questionnaires were personally distributed from which 105 filled
questionnaires were returned. The validity of the questionnaire used in this study was
guaranteed by previous studies and experts’ opinions which have done a few alterations as
well as a pretest. Reliability was measured by Cronbach’s alpha which was 0.73 for the whole
questionnaire.
Data analysis was done on 105 completely filled questionnaires by SPSS. According to
central limit theorem, regarding high sample size, sample mean have normal distribution so
we can use t-test. So, two independent sample t-test was used to analyze the differences in
viewpoints of successful versus unsuccessful entrepreneurs. Friedman test was also used to
compare mean ranking of two groups of entrepreneurs.
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Table 1 Description of variables
Dimensions Components Concepts
Individual Lack of motivations Change of motivation over time
Lack of motivation for continuation of the job
Disappointment in the business
Lack of skills Lack of management skills
Lack of marketing skills
Lack of crisis management skills
Lack of capabilities Lack of proper education
Lack of proper time spent for the business
Lack of proper knowledge and experience
Inappropriate characteristics Have a traditional look at the business
Family problems psychological pressures
Over confidence on others
Insist on mistake and continue the job
Immediate
environment
Customers issues Single customer
Financial problems of customers
Focus of customer on price rather than quality
Suppliers issues Difficulty to access suppliers
Single supplier
Intensity of competition Lack of flexibility in the competition
Import of similar products
International competitors and high quality of their products
Poor performance of banks and
credit institutions
Poor performance of credit in industry sector
High interest rate
Lack of access to loan at the proper time
Untrustable bank advisers
Misadventure Diseases, Dead
General
environment
Inappropriate economics situation Unstable and turbulent economic environment
Embargo
Inflation
High rate of interest
Changing technology Use of new technology
High cost of technology
Inappropriate policies Bureaucracy
Instability of rules and regulation
No guarantee and monitoring to execute the rules
Execute subsidies rule
Liberalization of prices
Lack of detailed information on business
No support to entrepreneurs
Social factors issues Lack of role models
Work of women entrepreneurs in a male dominated area
Negative view of society to entrepreneurs
Culture of rule averse in the business environment
No culture of ethical esteem in the business environment
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Results
As Table 2 shows, most of the unsuccessful respondents in our sample (85%) were between
25 and 45 years old and married. This percentage for the successful respondents was
(83.2%). 96.2% of unsuccessful respondents and 92.4% of successful respondents were male.
44.3% of unsuccessful entrepreneurs and 58% of successful entrepreneurs had university
degrees. About half of the unsuccessful business owners had experience in a related sector,
but only 30% had management experiences and 23.5% of them had previous entrepreneurial
experience. These percentages for successful entrepreneurs were 45%, 28%, and 27%
respectively. These businesses were in a different industry sector. Many of them were in
chemical industry (30.8% of unsuccessful and 35.3% of successful) as well as in mineral
nonmetal industry (21.2% of unsuccessful and 24.1% of successful). Furthermore, 50% of
these newly established small businesses failed before their second year of existence.
In order to understand the differences between successful and unsuccessful entrepreneur’s
viewpoints about business failure factors, we used two sample t-test. According to the
results in Table 3, in significance level of 90%, “corporate policy”, “manager/entrepreneur”,
and “immediate environment” are statistically significant.
Table 1 Description of variables (Continued)
Corporate
policy
Strategy and investments Poor sales model
Inadequate business financing strategy
Lack of correlation between production and marketing
strategies
Inappropriate pricing
Staff issues Lack of motivated staff
Lack of skilled staff
High cost of skilled staff
Partnership issues Dissension between partners
Exit of partner
Overconfidence in partnership
Lack of proper understanding of each other
Inappropriate task division between partners
Lack of cooperation between partners
Lack of effective communication between partners
Lack of transparency in the partnership
Lack of trust in partnerships
Lack of believe in one of partners about business success
Preference to amicable relations rather than working
relationships
Executive issues Inappropriate financial management
Improper placement of financial tools
Inaccurate market evaluation
No detailed assessment of duties and responsibilities in
business
Insufficient awareness of laws and policies and labor relations
Lack of appropriate response to problems
Inaccurate cost estimate
No evaluate the status of competitors
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Table 2 Sample description
Successful (n = 53) Unsuccessful (n = 52)
Personal variable
Age
Under 25 years old 10.3 6.8
Between 25 and 45 years old 83.5 85
More than 45 years old 6.2 8.2
Gender
Male 92.4 96.2
Female 7.6 3.8
Married 92.2 94.2
Level of education
Under diploma 7 10
Diploma 35 30
University degree 58 60
Previous experience
In a related sector 45 49
Management experience 28 30
Entrepreneurial experience 27 23.5
Organizational variables
Business lifetime
Less than 1 year 31 34.6
Between 1 and 2 years 26 34.6
Between 2 and 3 years 43 11.5
No response 0 19.2
Business activity
Metal industry 9.6 9.6
Mineral nonmetal industry 24.1 21.2
Alimentary industry 11.5 11.5
Electronic industry 1.6 1.9
Weaving industry 5.8 3.8
Chemical industry 35.3 30.8
Cellulose industry 10.8 5.8
No response 1.3 15.4
Table 3 Results of two sample t-test for business failure factors
Mean Std. differences T- test
Variable Succ. Unsuc. Succ. Unsuc. df sig t-Test
General environment 3.54 3.59 0.36 0.27 101 0.49 -0.685
Immediate environment 3.01 3.16 0.4 0.42 102 0.08* -1.761
Manager/Entrepreneur 2.93 3.14 0.57 0.69 102 0.1* -1.657
Corporate policy 2.98 3.13 0.37 0.49 101 0.1* -1.611
* p < 0.1.
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In addition, two sample t-test was used to show different viewpoints of entrepreneurs in
sub-items of the factors. Results in Table 4 show that in significance level of 95%,
“inappropriate policies”, “social factors issues”, “suppliers issues”, “intensity of competition”,
“misadventure”, “lack of skills”, “lack of capabilities”, “inappropriate characteristics”,
“partnership issues”, “strategy and investment”, and “staff issues” are statistically significant.
According to the results of Friedman test for successful entrepreneurs (P < 0.05,
chi-square = 72.2) and for unsuccessful entrepreneurs (P < 0.05, chi-square = 30.4),
“general environment” is the most important business failure factor (See Table 5).
Moreover, based on the results obtained from Friedman test on sub-items of business
failure factors, the four most important factors for successful entrepreneurs include
“inappropriate policies”, “inappropriate economic situation”, “lack of skills”, and “customers
issues” (P < 0.05, chi-square = 297.5), while for unsuccessful entrepreneurs these are
“inappropriate policies”, “lack of skills”, “strategy and investment”, and “inappropriate
economic situation” (P < 0.05, chi-square = 287.9) (See Table 6).
Discussion and conclusion
This study has been done to compare viewpoints of successful and unsuccessful
entrepreneurs about factors influencing business failure on a sample of 120 newly
established small businesses in industry sector.
As the results show “inappropriate policies” is the most important factor of business
failure for both successful and unsuccessful entrepreneurs. Most of respondents mentioned
the influence of policy factors on their businesses. Among these, lack of support to
entrepreneurs, instability of rules and regulation, lack of guarantee as well as monitoring to
execute the rules, and bureaucracy have more influence on business failure. The results
obtained from this study show that Iranian entrepreneurs work in an unsupportive and
Table 4 Results of two sample t-test for sub-items of business failure factors
Mean Std. differences T –test
Variable Succ. Unsuc. Succ. Unsuc. df sig t
Inappropriate economic situation 3.75 3.71 0.51 0.5 101 .69 .4
Inappropriate policies 3.75 4.01 0.5 0.42 102 .007* -2.74
Changing technology 3.15 3.48 1.11 1.19 102 .143 -1.47
Social factors issues 3.14 2.9 0.56 0.53 101 .029* 2.22
Customers issues 3.36 3.48 0.37 0.53 102 .222 -1.23
Suppliers issues 2.96 3.48 1.08 1.3 102 .032* -2.173
Intensity of competition 2.76 2.35 0.98 0.88 102 .005* 2.178
Poor performance of bank and credit 2.81 3.28 0.87 0.77 102 .141 -2.885
Misadventure 2.33 2.11 0.88 0.68 101 .001* 1.485
Lack of motivation 2.37 3.15 0.96 1.2 101 .258 -3.398
Lack of skills 3.86 3.97 0.78 0.73 102 .014* -1.138
Lack of capabilities 2.66 2.13 1.01 1.14 102 .060* 2.496
Inappropriate characteristics 2.49 2.81 0.84 0.84 102 .000* -1.904
Executive issues 3.22 3.53 0.41 0.4 102 .344 -3.831
Partnership issues 3.11 3.3 0.74 1.16 102 .002* -.953
Strategy and investment 2.96 3.71 1.03 1.2 101 .000* -3.234
Staff issues 2.4 1.86 0.74 0.7 102 .033* 3.753
*p < 0.05.
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bureaucratic environment with sometimes unstable rules which could reverse the life of
entrepreneurs. So, Iranian business environment, despite its recent efforts to change, does
not yet encourage individuals to become entrepreneurs. Inappropriate polices such as
instability of rules and regulations cause of bewilderment in investing and continuing
business for example subside rules and liberalization of price change all plane of
entrepreneurs in business especially for start-ups and new established business that
faces many challenges in early years of activity. Bureaucracy in taxation rules, business
licenses and permission of activity is also influence on entrepreneurs and makes them
disappointment; it sometimes reduces their motivation to continue their activity.
The second most important business failure factor for unsuccessful entrepreneurs and the
third one for successful entrepreneurs is “skill”. This demonstrates that the entrepreneurs
know about their weaknesses in management skills. They mentioned lack of management
skills, marketing skills, and crisis management skills in their responses. It is because of no
integration of these skills in Iranian academic education. Despite of high rate of university
graduate in Iran, entrepreneurship education is not included in the curricula in almost all
majors. Just an optional course entitled entrepreneurship was considered for some majors
in some universities. Also, an entrepreneurship course is obligatory in vocational schools.
So, Iranian graduate students are prepared for being an employee rather than an employer.
Table 5 Results of Friedman test on business failure factors
Variable Mean rank Rank
Successful Unsuccessful Successful Unsuccessful
General environment 3.72 3.4 1 1
Immediate environment 2.22 2.18 2 3
Corporate policy 2.14 2.28 3 2
Manager/entrepreneur 1.93 2.14 4 4
Table 6 Results of Friedman test on sub-items business failure factors
Mean rank Rank
Variable Succ. Unsuc. Succ. Unsuc.
Inappropriate economic situation 13.61 11.36 2 4
Inappropriate policies 13.73 13.74 1 1
Changing technology 9.3 10.57 8 7
Social factors issues 9.9 7.58 6 13
Customers issues 11.47 10.46 4 8
Suppliers issues 8.83 10.76 9 6
Intensity of competition 7.32 5.29 12 14
Poor performance of bank and credit 7.41 9.16 11 10
Misadventure 5.66 4.14 15 16
Lack of motivation 5.66 8.93 16 11
Lack of skills 13.37 13.28 3 2
Lack of capabilities 6.99 4.8 13 15
Inappropriate characteristics 6.21 7.74 14 12
Executive issues 9.4 9.42 7 9
Partnership issues 10.07 11.09 5 5
Strategy and investment 8.74 11.51 10 3
Staff issues 5.34 3.18 17 17
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Inappropriate economic situation is one of the most important business failure factors for
both groups of successful and unsuccessful entrepreneurs. In fact, even those who can
survive in their businesses in such bad economic situation indicate the influence of unstable
and turbulent economic environment, embargo, inflation and high rate of interest.
Economic situation in Iran is not proper for entrepreneurs actually it’s reduce their
motivation. Based on Iranian national statistics center in 2014, some indexes like rate of
inflation is 32.5% and also credit repayment rate is between 18-25%. These things create
uncertainty situation to investment and return of investment.
Also, for unsuccessful entrepreneurs who experience failure in businesses, “strategy and
investment” is an important factor, while successful entrepreneurs do not emphasize on this
it. Poor sales model, inadequate business financing strategy, lack of correlation between
production and marketing strategies and inappropriate pricing are factors have been
mentioned by respondents in this regard. The importance of these factors for unsuccessful
entrepreneurs might be explained by their weakness in the field of strategy. No attention to
business strategy especially regarding business financing among start-ups has caused many
business failures in Iran.
While suppliers issues including access to suppliers and the problem of single supplier is
an important factor for unsuccessful entrepreneurs, customers issues such as the problem
of single customer, financial problems of customers and focus of customer on price rather
than quality are more important for successful ones.
Access to financial resources was not a very important issue for both of them. It is true
that both groups deal with this problem and in many cases don’t access to loan in a right
time due to business failure, and consequently they stop all business activities. However,
successful entrepreneurs who have a business strategy and appropriate investment succeed
to survive their businesses in spite of not having access to financial resources.
Also, unsuccessful entrepreneurs indicated the importance of motivation in business
failure. They mentioned changes of motivation over time, lack of motivation for
continuation of the job and disappointment in the business. It is obvious that a business
especially start-ups deals with a lot of challenges, and successful entrepreneurs are those
who are enough strong and perseverant to deal with these challenges. As the results show,
the unsuccessful entrepreneurs didn’t feel enough motivation to continue and this was an
important factor caused business failure.
This study tried to show business failure factors in a different approach. This is the first
study on business failure factors based on successful and unsuccessful entrepreneurs’
viewpoints. The different characteristics of successful and unsuccessful entrepreneurs such
as education level and previous experience were analyzed. Also, different viewpoints of
successful entrepreneurs who certainly experienced a small defeat but could come out of
them versus unsuccessful entrepreneurs who experienced total defeat, help policy makers
for better facilitation of business process and also providing the suitable entrepreneurship
education programs. Such educational programs improve business skills and reduce the
probability of business failure. Therefore, policy makers can use the results of this study to
decrease the business failure. Reduce bureaucracy help entrepreneurs to continue their
activities in a safe situation and increase their motivation to continue their businesses. Also,
this survey shows most of businesses have experienced failure in 1 or 2 years after start, so
policy makers can facilitate business creation and make the business environment more
favorable and consider incentives to motivate entrepreneurs to remain in their business.
Arasti et al. Journal of Global Entrepreneurship Research 2014, 4:10 Page 12 of 14
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Access to unsuccessful entrepreneurs was one of challenges in this study. It is because
they usually have a tendency not to restate the memories about their failure. It is suggested
that Future studies examine business failure factors with the same approach but in other
sectors. These studies could be done in order to find solutions to reduce business failure,
based on successful and unsuccessful entrepreneurs’ viewpoints. Examining the influence of
different types of end products on business failure factors would also be an interesting area
for future research.
Endnote
a
Eshtehard is a small industrial town near Tehran.
Competing interests
The authors declare that they have no competing interests.
Authors’ contributions
FZ carried out the data gathering and analysis. NB help us in data analysis and drafted the manuscript. All authors read and
approved the final manuscript.
Acknowledgments
None.
Received: 8 September 2013 Accepted: 21 May 2014
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