"There are no failures — only feedback."

R. Bandler

"What we call failure is not the falling down, but the staying down."

Mary Pickford

“I would never promote to a top-level job a man who was not making mistakes...otherwise he is sure to be mediocre."

Peter Druker

"Failure is the opportunity to begin again more intelligently."

Henry Ford

"A minute’s success pays the failure for years."

Robert Browning

(Source: motivatingquotes.com)

Introduction

The idea that failure could, in any walk of life, be a desirable outcome appears absurd, and asked whether you wish to fail, one would presume the question to be rhetorical, however, as the quotes above demonstrate, some believe differently.

This essay will discuss how desirable failure within an entrepreneurial activity, looking into both arguments for and against this issue. This includes what is learnt from a failure, as well as what is not. It is also important to recognise that risk is intrinsically relative to failure and this will also be addressed.  The idea of “luck” also comes into this argument, which will be explored, but firstly we must define who it is who may or may not benefit from failure.

The Entrepreneur

What is an entrepreneur? Many people take the opinion that the term entrepreneur covers only a few people, with Virgin owner Richard Branson being the stereotype. The theory to which this opinion is related is that the motivation is purely financial, growth is crucial and amassing a huge personal fortune is critical. However, the umbrella of entrepreneurs spreads beyond the loadsamoney image of the 1980’s.

There are many different views on what defines an entrepreneur but for the purpose of this essay, the contemporary definition set out by Timmons (1989:p48) will be used. “Entrepreneurship is a human, creative act that builds something of value from practically nothing. It is the pursuit of opportunity regardless of the resources or lack of resources, at hand. It requires a vision and the passion and the commitment to lead others in the pursuit of that vision. It also requires willingness to take calculated risks.” This can be simplified as to someone who takes, finds or uses resources to do something new, and is highly motivated to achieve their vision.

Describing Failure

There are many different views and opinions within the entrepreneurial world as to what counts as failure, and as such it is difficult to define. To demonstrate how a failure can be a success, and what effects whether something is a success or failure we will borrow from the world of football. In football a failure is;

•relative to the league position and/or quality of players (situation),

•dependant on number of matches (time frame) being discussed

•based on expectations of ;

oTeam and club members (internal: owner/employees/share holders)

oFans, journalists, other team footballers (external: competitors, industry analysts, customers etc.)

For example, if Arsenal, Champions of the previous season loose their first three matches of the season to the three teams just promoted up from the league below, this series of results maybe deemed a failure. This would be because their situation, relative to their opposition suggests they should be victorious, the time frame is only three matches, and everyone’s expectations were for three Arsenal victories.

It skip back to the entrepreneurial world, business ‘x’ whose initial sales are dramatically lower than their forecasts, and competitors they deemed to be inferior have been taking their market share, then some may be quick to describe business ‘x’ as a failure.

Jumping back to the parallel of football, should the time frame be extended to the whole season and Arsenal were to change their training regime (a change to internal factors) and win all other games and ended the season crowned champions it would certainly not be deemed a failure. Some may even argue that it was the early season “failures” which spurred the team onto their Championship success.

Again, linking this back to the entrepreneur, what if, because of the early “failure” business ‘x’ experienced, the employees were better motivated or trained which led to better quality production or service, then over the financial year, business ‘x’ maybe deemed a success. In these parallel examples, the football manager/entrepreneur is reactive to the failings and changes things in an attempt to change the teams/businesses fortune. This is in fact a demonstration of how failure can be desirable because it makes the entrepreneur realise there has been something wrong and encouraged change.

Defining Failure

The main definition given by the Cambridge dictionary describes failure as “to not succeed in what you are trying to achieve or are expected to do”. This idea of failure being relative to the targets – what one is attempting to achieve – is an effective one for this essay, and one which is echoed by McGrath (1999). “An initiative can be said to have failed when it is terminated as a consequence of actual or anticipated performance below a critical threshold (Gimeno, Folta, Cooper, & Woo, 1997). In other words, failure is the termination of an initiative that has fallen short of its goals.” It is however, interesting that McGrath includes the idea of closure due to “anticipated (poor) performance” as a form of failure. This is to say that when it is recognised that a business is sliding down the proverbial slippery slope, if it is closed it should be classed as a failure.

The business information service company, Dun and Bradstreet however use a differing definition of failure in their 1998 census research. Failure is defined as when “Firms (become) involved in court proceedings or voluntary actions involving losses to creditors; Firms going out of businesses without loss to creditors are not considered business failures: they are discontinued businesses.” This definition suggests that as long as the business closes with out dropping below Gimeno et al.’s “critical threshold” – even when it has been forecast – it is not classed as a failure.

Causes of Failure

The causes of failure can be split into four many categories; Market, Operational, Financial, and Human (Cave, 207 Failure Lecture, Wk8). In terms of market failure, the most common error it seems is in the entrepreneur being overly optimistic regarding the market they are entering or a part of. As Deakins (1996) discovered, a lack of market knowledge was the fourth most important factor in business failure. Operational failure covers such things as the location of the business, cost estimates, and excessive start up costs. The Financial failure covers poor cash management, high-gearing, and taking too much income out of the business (excessive drawings). These first three categories are all external causes of failure. Human of course covers all managerial sides of the business, and is therefore an internal cause of failure, and the most controllable of the four categories.

Learning from Failure

The most important, and commonly citied reason, purpose and benefit of failure is to what is learnt, and this can be the desirable outcome of the failed entrepreneurial activity.

Deakins, for example, found that a lack of knowledge of marketing was the most important factor in business failure but of course this, as with any other factors of business failure must be recognised by the entrepreneur.

Zacharakis, Meyer, & DeCastro (1999) bring in the “fundamental attribution error” which says that “attribution theory predicts that people are likely to attribute their failures to external causes (Bettman and Weitz 1983; McArthur 1972) whereas they will attribute other people's failures to internal causes.” By this Zacharakis et al. suggest that the attribution theory – something which is part of human nature – means entrepreneurs are more likely to recognise managerial factors as the source of failure for other business failures. However, when discussing their own business failures they are more likely to blame external factors, those that are out of their control for the businesses collapse. The figures are more positive than this suggests however, with entrepreneurs in the Zacharakis et al. studies citing internal factors 58 percent of the time when considering their own failures and 89 percent of the time when considering failures across all entrepreneurial activity.

“By identifying external causes, such as changes in product market conditions or financing problems, entrepreneurs exonerate themselves and protect their egos.” This view considers that some entrepreneurs may rule themselves out as a cause of failure as to maintain their own personal image of themselves. For entrepreneurs in whom this trait is present Zacharakis et al. suggest that rejecting that failure was a result of their actions – or inactions – are far less likely to succeed in other business ventures because they are “probably directing their problem-solving efforts to the wrong place.”

Zacharakis et al. also recognise that the entrepreneur may fear that investment will dry up if they admit that it was their error that led to the failure. “In addition, the entrepreneur may believe that capital will be more forthcoming if the problem is external, since the cause of failure was not poor management but market or external forces.”

However, Cope, Cave and Eccles (2004) state that a “VC’s decision to invest in an entrepreneur is not negatively affected to any significant degree by a previous experience of failure” and that as long as the entrepreneur can explain the reason for the failure, acknowledge their limitations and be prepared to “stand aside if necessary then the ability to receive future VC support is not jeopardised to any significant extent.” Having said this Cope et al. also state that if there have been “multiple failures and very little success” then it is important to question the abilities of the entrepreneur.

Management change from failure

It has been recognised that some entrepreneurial activity fails because the entrepreneur, although successful in start-up and business creation, is let down by their management abilities. Meyer and Dean (1990) describe this as the “executive limit” of the entrepreneur, when “their inability to manage the firm becomes detrimental” (Zacharakis et al.). It is therefore important to implement a professional manager as this is more likely to encourage survival in the business (Zacharakis et al. : Flamholtz 1986; Hambrick and Crozier 1985; Hofer and Charan 1984; Tashakori 1980). Here again, the entrepreneur needs to learn their limitations, and understand that to be successful there is the importance of professionals for every part of the system that makes up their business. Recognising that their business has moved on and although it is still their business, it is crucial to have a good team themselves.

Risk and Failure

The Timmons definition of the entrepreneur used within this essay includes that the entrepreneur “requires (a) willingness to take calculated risks”, that is, risks which the entrepreneur believes to be low enough in relation to the possible future success. This is backed up by Swinson (1998) states that “Risk-taking lies at the heart of profitable business.” Inherent within any risk is the possibility of either failure or success, and therefore a business failure would suggest that a risk-taker was possibly at the helm. 

Luck from Failure

An interesting issue raised by the guest lecturer Ian Gordan was the idea a failure becoming fortunate. I forget which industry Mr Gordan was working within, but the venture failed and he was forced to cease trading within it. This failure meant that he become removed for one industry and in order to recover, he plunged himself into the mobile communications industry – just as mobile phones began to take off across the world. He described how had it not been for the failure in the average industry he was a part of he would not have got into the mobile communications industry at, what in hindsight, was such an opportunistic time.

Conclusion

In direct response to the question, failure is not, in itself a desirable outcome of entrepreneurial activity, if by this the question asks “is failure, separated from all other aspects (e.g. Learning, experience etc.), a desirable outcome of entrepreneurial activity”. How ever, common sense has led the author to believe that the topic was to encourage thought surrounding the pro’s and con’s of failure, and as such has engaged in this activity.

As shown at the beginning of this essay; Henry Ford once said "Failure is the opportunity to begin again more intelligently." This helps in answering the question, in that failure leads to trying again, and, as a factor in the Timmons definition of an entrepreneur is in being highly motivated, the aspect of trying again is more inherent in an entrepreneur. In contradiction to Mr Ford’s statement however, it must be said that the most desirable outcome of all would surely be to succeed first time.

This leads onto the entrepreneurial love of “lady luck”. Many entrepreneurs speak of luck based on their current situation, and therefore base it on fortunate circumstances or being in the right place at the right time. But where could any one of these entrepreneurs be now had they not experience failure, did it indeed improve them, did they learn the right lessons, or have they in fact merely exceeded their expectations following the knock back of failure?

Bibliography

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Carter, S, Jones Evans, D; Enterprise and the small Business. Prentice Hall, England 2000

Cave, F (2004) Business closure and Failure, ENTR 207 lecture, Wk 8

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Deakins, D, ‘Entrepreneurship and small firms’, McGraw-Hill (1996) cited in ENTR207 Failure Lecture, week 8

Dun and Bradstreet: Statistical Abstract of the United States: 1998

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