Description
In this brief outline regarding seven deadly factors associated with technology company failure.
EUROPEAN JOURNAL OF MANAGEMENT, Volume 9, Number 4, 2009 194
SEVEN DEADLY FACTORS ASSOCIATED WITH TECHNOLOGY COMPANY FAILURE
Andres C. Salazar, Northern New Mexico College, Espanol a, NM, USA
ABSTRACT
Seven factors associated with technology company failure (or death) are described along with
features that distinguish each factor. A company is commonly defined to have failed when it
passes through a stage of insolvency and then an asset sale or a merger. It is well known that
several critical factors can lead to a successful launch of a company – market timing,
management experience, product differentiation, product quality, financing, sales execution, team
compatibility, etc. High tech companies deal with additional risks at launch such as
commercialization difficulties, team formation and technology lifespan. Little research has been
done on identifying major factors that can lead to company failure once the company is launched
and has reached the first stage of sustainability, for example, operational income is positive.
While some business factors that are important at launch are also important during later stages of
the company there are other forces, both internal and external, that can lead to company death.
This paper proposes that there are at least seven basic factors associated with business failure
that manifest themselves in technology based companies and an illustration is drawn for each
type. The study herein can be useful to investors of technology and the entrepreneurs they
employ in their never ending quest for profitable innovation.
Keywords: Business Failure, Management of Technology, Insolvency of Technology Firms.
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.
EUROPEAN JOURNAL OF MANAGEMENT, Volume 9, Number 4, 2009 195
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 nature as
an important factor in business failure with eighty percent of all business failures attributed to
managerial issues. Sheldon (1994) concluded that “internal factors requiring administrative
action” was an important factor in business failure. In J usko (2003) “leadership mistakes” was
offered as an important factor leading to business failure. From a major auditing firm – Coopers
and Lybrand – its newsletter in 1973 cited a Bank of America study that indicated “managerial
incompetence or inexperience” as causing 90 percent of business failure. Although Gaskill et al
(1993) conducted a study of the apparel and accessory companies, an area removed from the
high tech industry, that study also concluded that “poor management skills” or “poor managerial
functions” accounted for a major factor in business failures. In one particular article by Osborne
(1993) an argument is made that “the horse is often more important than its rider in determining
entrepreneurial success. Finally, Hayward (2001) indicates that poor management is the cause
of one half of all UK bankruptcies.
Among many examples of managerial errors that can lead to failure, authors have cited those in
Table 1.
Managerial Error Impact Comment
Lack of Planning Resources not available to
react to situation
This error is associated with
managers who manage “on
the fly.”
Reckless money management Cash shortages can lead to
angry employees, suppliers,
etc.
The management of cash is a
critical function at any
company stage.
Poor Bookkeeping This can lead to late payments
to suppliers, erroneous
invoices to customers, lack of
inventory control, etc.
This symptom is a telltale sign
of mismanagement.
Poor Relations with
employees, suppliers,
partners.
Difficulties in maintaining a
uniform level of product quality
or service level result from this
error.
Lack of communications to key
stakeholders is a precursor to
this error.
Inattention to investor or bank
concerns
Return on investment or
security of loan are important
concerns to investors/banks.
Being cut off from additional
funding is usually the result
from this error.
Ignore the Market &
Customers
Rate of sales, product returns,
product or service quality are
valuable as performance
feedback.
This error can take the form of
poor market strategy, lack of
sales training and little or no
product management.
EUROPEAN JOURNAL OF MANAGEMENT, Volume 9, Number 4, 2009 196
Wrongful Hires or Firings Legal battles can ensue with
poor handling of employment
issues.
Such issues include sexual
harassment, discrimination,
unfair pay practices, etc.
Table 1 – Managerial Error Categorization
2.2 Factor 2 – Expansion and Diversifi cation
A review of pertinent literature also reveals that the process of expansion or diversification places
a high tech firm in a “high risk” situation. Sommers and Koc (1987) argue that a high tech
company undergoes stress in every aspect of the organization when there is a high rate of
change as in expansion or diversification. This may explain Lewis’ (2002) data that indicates
incubation services assist in the survival of young companies undergoing growth. Expansion into
international markets, for example, often requires substantial planning and possibly a different
approach in sales, distribution, and servicing of products.
This factor applies to the case where a company is relatively stable but embarks on an ambitious
product or market expansion. An example of this type of expansion is that of a company with a
performing market segment decides to try marketing its products or services to a radically
different market segment.
Expansion problems can surface from a merger with or an acquisition of another company
especially if the target is a company addressing a different market, has redundant employees,
has problems of its own, etc. Mergers and acquisitions can create stress in both employees and
management and issues associated with this type of company expansion are often
underestimated in expense, time and effort required to resolve them.
2.3 Factor 3 – Markets, Marketing & Sales
Schiffman (1998) notes that 80% of new businesses fail in the first two years and attributes lack
of sales experience as a major factor to their demise. That comment gives credence to the nature
of the business and its market environment as being an important factor in determining failure or
success. Competition, availability of product, pricing, sales strategy all can be misjudged or mis-
executed and thus lead to firm failure. An anticipated market may never develop or is actually too
small to support business plan. Unanticipated or unfair competition can dry up sales despite
efforts to counteract such attacks. Wrong market channels, unacceptable substitute products, ill-
advised market positioning, customers too hard to reach are all examples of bad market strategy.
2.4 Factor 4 – Financing, Accounting & Equity
“Capital structure” was the top failure theme in the Birley and Nikitari (1996) study of companies.
Funding a company’s business plan may depend on anticipated revenue but more often than not,
external financing is required. Frequently, this means a dependency on equity investment
proceeds, loans or bank lines of credit. Unrealistic business plans in which product costs or
operational expenses are understated or misunderstood can lead to fatal financing issues.
Entrepreneurs, inexperienced in finance, can underestimate expenses and costs of running a
company and exacerbate the problem by resisting an equity dilution that could salvage the
enterprise if done in a timely manner. Technology companies are especially susceptible to
funding problems since their products and services are prone to sudden changes in content,
features and component availability. Such unpredictability causes financial risk that must be dealt
with expeditiously thus putting pressure on investors, banks and key suppliers.
2.5 Factor 5 – Technology & Intell ectual Property
Unanticipated problems with technology ownership, development, testing or manufacturing in the
form of unacceptable products or services can lead to delayed revenue realization or worse,
product returns and quality issues. Technology is pervasive in that modern companies have come
to depend on it in the storage and retrieval of company critical information, in its appropriate
deployment in products or services, in its performance for customers or the environment, and in
its effects on the health of customers. Drug companies are susceptible to latent effects of its
technology-based products while computer glitches have led to failure for information-based
EUROPEAN JOURNAL OF MANAGEMENT, Volume 9, Number 4, 2009 197
firms. Technology has become so pervasive in almost any company’s operations since near-
paralysis can set in if ERP or simple computer based transactions such as sales, inventory
control, payroll or supplier payments are dysfunctional.
Often associated with technology is the company’s ownership of the inherent intellectual property.
Infringement lawsuits essentially shut down Napster when its business model was found to be
dependent on trafficking copyrighted material.
2.6 Factor 6 – Personnel Issues, Ethics, Culture & Unions
Possibly the most difficult problem to solve in an organization is one dealing with personnel. Lack
of rapport among important team members, between the CEO and the Board, between a
manager and his/her direct reports or employee unions, etc., are among personnel issues that
can lead to disastrous outcomes for a company. Fraud, integrity, embezzlement, immoral and
unethical behavior on the part of key employees can sink a company. Often the “culture” of a
company with personnel issues is one in which employees exhibit little or no loyalty to the firm, do
not identify with stated strategic goals of the company and tend to exploit the firm instead of
supporting it. Enron as a company is a notable and a recent victim of this factor. It has often been
said that the most important asset of a company is its people. The origin of this observation was
probably from someone who witnessed a positive contribution from an employee but personnel
actions can also have a negative effect on the company’s fate. Obviously managers can wield
more negative power than lower level employees but danger can originate at any level. This
factor is distinct from the “Management” factor described previously in that errors in managerial
judgment need not be associated with organizational or personnel issues such as ethics or
interpersonal relationships.
2.7 Factor 7 – Government Regulation & Intercessi on
New markets can be created and existing markets can be destroyed by governmental rules and
regulations. Deregulation of the telephone industry in the early 1970’s is an example of new
market creation. Mandated warning labels on cigarettes among other associated regulations shut
down or virtually killed many brands relatively quickly. (Miles, 1982)
This particular factor has manifested itself recently in the actions of the federal government under
the Obama administration. Intercession by federal agencies have either salvaged failing
companies or accelerated their death in the name of protecting the national economy.
Governmental intercession with untoward impact to the company can take several forms as listed
in Table 2. (Porter, 1990)(Salazar, 2007)
Gov’t Intercession Impact Comment
R&D Funding
(eg., SBIR, see Lerner, 1999)
If terminated, R&D expense
could become unmanageable
Technology companies can be
especially vulnerable to the
level of assistance.
Purchasing Sales diminished Government, due to its size,
can become a dominant
consumer.
Infrastructure Sales, manufacturing,
distribution could be
dependent on governmental
investment in roads, seaports,
airports or utility access.
Normally, government
investment of this type is long
term and sizable but subject to
budget oscillations.
Training & Education Quality of personnel could be
adversely affected without this
aid.
Similar to infrastructure
investments.
Tax Incentive Business model may not be
feasible without this
assistance.
This type of aid is temporary
and the company must reach
a certain level of sales to
achieve sustainability.
Trade Restrictions Overseas competition could Highly unpopular among free
EUROPEAN JOURNAL OF MANAGEMENT, Volume 9, Number 4, 2009 198
be kept at bay with this shield. trade advocates. Lifting of
restrictions can spell doom to
those unprepared.
Table 2 Types of Governmental Intercession & Their Adverse Impact
7. CONCLUSION
In reviewing literature on the subject of firm failure it has been found that there are at least seven
major factors that can lead to business termination. Each factor, if not addressed in a timely
manner and appropriately can lead to a dangerous stage of the company – insolvency – and
eventually to an unplanned termination such as liquidation (including asset sale) or merger.
8. BIBLIOGRAPHY
Anonymous, (1973), “Some Common Reasons for Business Failure,” Coopers & Lybrand
Newsletter, (November).
Birley, Sue & Niktari, Niki (1996), “Reasons for Business Failure,” Leadership and Organization
Development Journal, 17, No. 2, 52.
Bruno, Albert V., Leidecker, J .K., & Harder, J oseph W., 2001, “Why Firms Fail,” Business
Horizons, (March-April), 50.
Gaskill, LuAnn Ricketts; Van Auken, Howard E; & Manning, Ronald A., (1993), “A Factor Analytic
Study of the Perceived Causes of Small Business Failure,” Journal of Small Business
Management, 31 (October) 18.
Hayward, Cathy, (2001), “Going for Broke,” Financial Management, (April) 22.
J usko, J ill, (2002), “Secrets to Longevity,” IndustryWeek, (March), 24.
Lerner, J osh (1999), The Government as Venture Capitalist: the long-run impact of the SBIR
program,” J ournal of Business, 72 (No. 3), 285-318.
Lewis, David A. (2002), “Does Technology Incubation Work?” 28. Athens, Ohio: NIBIA
Publications.
Miles, R. H., (1982), Coffin Nails and Corporate Strategies, Englewood Cliffs, NJ : Prentice Hall,
ISBN 0131398164.
Osborne, Richard L., (1993), “Why Entrepreneurs Fail: How to Avoid the Traps,” Management
Decision, 31 (No. 1) 18.
Porter, M. (1990) “Government Policy,” Chapter 12, The Competitive Advantage of Nations, NY,
Free Press, pp 617-653.
Richardson, A.P., (1914), “Causes of Business Failure,” Journal of Accountancy, 18 (Sept) 208.
Salazar, Andres C. (2006), “Study of Failure of High Technology Firms Through Near-Death
Experience,” Proceedings of US Association of Small Business and Entrepreneurship
Conference, Tucson, AZ, J anuary 2006.
Salazar, Andres C. (2007) “Innovation and National Economic Strategy,”International Journal of
Business Strategy, 7 (No. 2) pp198-205.
Schiffman, Stephan, (1998), “Venture Capital is Flowing to Small Businesses and Still So Many
Fail,” The American Salesman, 43 (December), 3.
Sheldon, Dan, (1994), “Recognizing Failure Factors Helps Small-business Turnarounds,”
National Productivity Review, 13(Autumn) 533.
Sommers, William P. & Koc, Aydin, (1987), “Why Most New Ventures Fail (And How Others
Don’t),” Management Review, 76 (Sept) 35.
Swiercz, Paul Michael & Lydon, Sharon R., (2002) “Entrepreneurial Leadership in High-Tech
Firms: A Field Study, Leadership and Organization Development Journal, 23 (No. 7)
380.
Author Profil e:
EUROPEAN JOURNAL OF MANAGEMENT, Volume 9, Number 4, 2009 199
Dr. Andres C. Salazar earned his PhD at Michigan State University in 1967. Currently he is Dean,
College of Engineering at Northern New Mexico College, Espanola.
doc_576469584.pdf
In this brief outline regarding seven deadly factors associated with technology company failure.
EUROPEAN JOURNAL OF MANAGEMENT, Volume 9, Number 4, 2009 194
SEVEN DEADLY FACTORS ASSOCIATED WITH TECHNOLOGY COMPANY FAILURE
Andres C. Salazar, Northern New Mexico College, Espanol a, NM, USA
ABSTRACT
Seven factors associated with technology company failure (or death) are described along with
features that distinguish each factor. A company is commonly defined to have failed when it
passes through a stage of insolvency and then an asset sale or a merger. It is well known that
several critical factors can lead to a successful launch of a company – market timing,
management experience, product differentiation, product quality, financing, sales execution, team
compatibility, etc. High tech companies deal with additional risks at launch such as
commercialization difficulties, team formation and technology lifespan. Little research has been
done on identifying major factors that can lead to company failure once the company is launched
and has reached the first stage of sustainability, for example, operational income is positive.
While some business factors that are important at launch are also important during later stages of
the company there are other forces, both internal and external, that can lead to company death.
This paper proposes that there are at least seven basic factors associated with business failure
that manifest themselves in technology based companies and an illustration is drawn for each
type. The study herein can be useful to investors of technology and the entrepreneurs they
employ in their never ending quest for profitable innovation.
Keywords: Business Failure, Management of Technology, Insolvency of Technology Firms.
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.
EUROPEAN JOURNAL OF MANAGEMENT, Volume 9, Number 4, 2009 195
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 nature as
an important factor in business failure with eighty percent of all business failures attributed to
managerial issues. Sheldon (1994) concluded that “internal factors requiring administrative
action” was an important factor in business failure. In J usko (2003) “leadership mistakes” was
offered as an important factor leading to business failure. From a major auditing firm – Coopers
and Lybrand – its newsletter in 1973 cited a Bank of America study that indicated “managerial
incompetence or inexperience” as causing 90 percent of business failure. Although Gaskill et al
(1993) conducted a study of the apparel and accessory companies, an area removed from the
high tech industry, that study also concluded that “poor management skills” or “poor managerial
functions” accounted for a major factor in business failures. In one particular article by Osborne
(1993) an argument is made that “the horse is often more important than its rider in determining
entrepreneurial success. Finally, Hayward (2001) indicates that poor management is the cause
of one half of all UK bankruptcies.
Among many examples of managerial errors that can lead to failure, authors have cited those in
Table 1.
Managerial Error Impact Comment
Lack of Planning Resources not available to
react to situation
This error is associated with
managers who manage “on
the fly.”
Reckless money management Cash shortages can lead to
angry employees, suppliers,
etc.
The management of cash is a
critical function at any
company stage.
Poor Bookkeeping This can lead to late payments
to suppliers, erroneous
invoices to customers, lack of
inventory control, etc.
This symptom is a telltale sign
of mismanagement.
Poor Relations with
employees, suppliers,
partners.
Difficulties in maintaining a
uniform level of product quality
or service level result from this
error.
Lack of communications to key
stakeholders is a precursor to
this error.
Inattention to investor or bank
concerns
Return on investment or
security of loan are important
concerns to investors/banks.
Being cut off from additional
funding is usually the result
from this error.
Ignore the Market &
Customers
Rate of sales, product returns,
product or service quality are
valuable as performance
feedback.
This error can take the form of
poor market strategy, lack of
sales training and little or no
product management.
EUROPEAN JOURNAL OF MANAGEMENT, Volume 9, Number 4, 2009 196
Wrongful Hires or Firings Legal battles can ensue with
poor handling of employment
issues.
Such issues include sexual
harassment, discrimination,
unfair pay practices, etc.
Table 1 – Managerial Error Categorization
2.2 Factor 2 – Expansion and Diversifi cation
A review of pertinent literature also reveals that the process of expansion or diversification places
a high tech firm in a “high risk” situation. Sommers and Koc (1987) argue that a high tech
company undergoes stress in every aspect of the organization when there is a high rate of
change as in expansion or diversification. This may explain Lewis’ (2002) data that indicates
incubation services assist in the survival of young companies undergoing growth. Expansion into
international markets, for example, often requires substantial planning and possibly a different
approach in sales, distribution, and servicing of products.
This factor applies to the case where a company is relatively stable but embarks on an ambitious
product or market expansion. An example of this type of expansion is that of a company with a
performing market segment decides to try marketing its products or services to a radically
different market segment.
Expansion problems can surface from a merger with or an acquisition of another company
especially if the target is a company addressing a different market, has redundant employees,
has problems of its own, etc. Mergers and acquisitions can create stress in both employees and
management and issues associated with this type of company expansion are often
underestimated in expense, time and effort required to resolve them.
2.3 Factor 3 – Markets, Marketing & Sales
Schiffman (1998) notes that 80% of new businesses fail in the first two years and attributes lack
of sales experience as a major factor to their demise. That comment gives credence to the nature
of the business and its market environment as being an important factor in determining failure or
success. Competition, availability of product, pricing, sales strategy all can be misjudged or mis-
executed and thus lead to firm failure. An anticipated market may never develop or is actually too
small to support business plan. Unanticipated or unfair competition can dry up sales despite
efforts to counteract such attacks. Wrong market channels, unacceptable substitute products, ill-
advised market positioning, customers too hard to reach are all examples of bad market strategy.
2.4 Factor 4 – Financing, Accounting & Equity
“Capital structure” was the top failure theme in the Birley and Nikitari (1996) study of companies.
Funding a company’s business plan may depend on anticipated revenue but more often than not,
external financing is required. Frequently, this means a dependency on equity investment
proceeds, loans or bank lines of credit. Unrealistic business plans in which product costs or
operational expenses are understated or misunderstood can lead to fatal financing issues.
Entrepreneurs, inexperienced in finance, can underestimate expenses and costs of running a
company and exacerbate the problem by resisting an equity dilution that could salvage the
enterprise if done in a timely manner. Technology companies are especially susceptible to
funding problems since their products and services are prone to sudden changes in content,
features and component availability. Such unpredictability causes financial risk that must be dealt
with expeditiously thus putting pressure on investors, banks and key suppliers.
2.5 Factor 5 – Technology & Intell ectual Property
Unanticipated problems with technology ownership, development, testing or manufacturing in the
form of unacceptable products or services can lead to delayed revenue realization or worse,
product returns and quality issues. Technology is pervasive in that modern companies have come
to depend on it in the storage and retrieval of company critical information, in its appropriate
deployment in products or services, in its performance for customers or the environment, and in
its effects on the health of customers. Drug companies are susceptible to latent effects of its
technology-based products while computer glitches have led to failure for information-based
EUROPEAN JOURNAL OF MANAGEMENT, Volume 9, Number 4, 2009 197
firms. Technology has become so pervasive in almost any company’s operations since near-
paralysis can set in if ERP or simple computer based transactions such as sales, inventory
control, payroll or supplier payments are dysfunctional.
Often associated with technology is the company’s ownership of the inherent intellectual property.
Infringement lawsuits essentially shut down Napster when its business model was found to be
dependent on trafficking copyrighted material.
2.6 Factor 6 – Personnel Issues, Ethics, Culture & Unions
Possibly the most difficult problem to solve in an organization is one dealing with personnel. Lack
of rapport among important team members, between the CEO and the Board, between a
manager and his/her direct reports or employee unions, etc., are among personnel issues that
can lead to disastrous outcomes for a company. Fraud, integrity, embezzlement, immoral and
unethical behavior on the part of key employees can sink a company. Often the “culture” of a
company with personnel issues is one in which employees exhibit little or no loyalty to the firm, do
not identify with stated strategic goals of the company and tend to exploit the firm instead of
supporting it. Enron as a company is a notable and a recent victim of this factor. It has often been
said that the most important asset of a company is its people. The origin of this observation was
probably from someone who witnessed a positive contribution from an employee but personnel
actions can also have a negative effect on the company’s fate. Obviously managers can wield
more negative power than lower level employees but danger can originate at any level. This
factor is distinct from the “Management” factor described previously in that errors in managerial
judgment need not be associated with organizational or personnel issues such as ethics or
interpersonal relationships.
2.7 Factor 7 – Government Regulation & Intercessi on
New markets can be created and existing markets can be destroyed by governmental rules and
regulations. Deregulation of the telephone industry in the early 1970’s is an example of new
market creation. Mandated warning labels on cigarettes among other associated regulations shut
down or virtually killed many brands relatively quickly. (Miles, 1982)
This particular factor has manifested itself recently in the actions of the federal government under
the Obama administration. Intercession by federal agencies have either salvaged failing
companies or accelerated their death in the name of protecting the national economy.
Governmental intercession with untoward impact to the company can take several forms as listed
in Table 2. (Porter, 1990)(Salazar, 2007)
Gov’t Intercession Impact Comment
R&D Funding
(eg., SBIR, see Lerner, 1999)
If terminated, R&D expense
could become unmanageable
Technology companies can be
especially vulnerable to the
level of assistance.
Purchasing Sales diminished Government, due to its size,
can become a dominant
consumer.
Infrastructure Sales, manufacturing,
distribution could be
dependent on governmental
investment in roads, seaports,
airports or utility access.
Normally, government
investment of this type is long
term and sizable but subject to
budget oscillations.
Training & Education Quality of personnel could be
adversely affected without this
aid.
Similar to infrastructure
investments.
Tax Incentive Business model may not be
feasible without this
assistance.
This type of aid is temporary
and the company must reach
a certain level of sales to
achieve sustainability.
Trade Restrictions Overseas competition could Highly unpopular among free
EUROPEAN JOURNAL OF MANAGEMENT, Volume 9, Number 4, 2009 198
be kept at bay with this shield. trade advocates. Lifting of
restrictions can spell doom to
those unprepared.
Table 2 Types of Governmental Intercession & Their Adverse Impact
7. CONCLUSION
In reviewing literature on the subject of firm failure it has been found that there are at least seven
major factors that can lead to business termination. Each factor, if not addressed in a timely
manner and appropriately can lead to a dangerous stage of the company – insolvency – and
eventually to an unplanned termination such as liquidation (including asset sale) or merger.
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Author Profil e:
EUROPEAN JOURNAL OF MANAGEMENT, Volume 9, Number 4, 2009 199
Dr. Andres C. Salazar earned his PhD at Michigan State University in 1967. Currently he is Dean,
College of Engineering at Northern New Mexico College, Espanola.
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