Around 20 percent of small businesses fail within their first year, with roughly 50 percent failing by the end of their fifth year. What makes these statistics interesting is that despite shifting economic factors, business failure rates remain relatively consistent. After surveying 101 failed startup businesses, a recent analysis revealed that 42 percent reported that the main reason for their failure was a lack of marketability. Businesses fail when they are not solving a marketable problem, or, “not solving a large enough problem that could be universally served with a scalable solution.” But what causes this so called lack of marketability?
A business’s marketability is directly tied to its adaptability - its willingness to alter its models and operations in order to keep up in today’s rapidly changing and unpredictable global environment. Marketability also relates to the way in which a business balances its forces of exploration and exploitation, with exploration referring to the search for knowledge and innovation, and exploitation referring to capitalizing and expanding upon these new ideas found through the exploration process. Too much exploration can lead to a business becoming obsolete, while too much exploitation can result in a business falling behind the technological curve and losing its competitiveness.
A good example of too much exploitation can be seen in the downfall of Sears due to its refusal to innovate and change its business model, ultimately leading to the end of Sears. At its peak in 1965, Sears was worth $92.1 billion in today’s money. That same year, its sales were 1 percent of the entire U.S. economy, with two-thirds of Americans shopping there in any given quarter and half the nation’s households owning a Sears credit card. Now, more than 50 years later, Sears has been fighting a losing battle against insolvency and erasure. Despite having the skills and resources necessary to adapt to the world of e-commerce, Sears lacked the foresight to anticipate and the willingness to adapt. This behaviour is often attributed to the “success trap”, in which companies stop exploring once they have reached a certain level of success, turning to exploitation - “becoming less innovative as they become more competent.”
In contrast, successful businesses are those that strike a balance between exploration and exploitation, adapting to market changes by adjusting their balance accordingly. This balance can be seen in the incredible story of Viciki Hollub, the first female CEO of a major international oil company, and how she managed to turn around a company that had lost $1 billion in 2016 to a profit of $4.1 billion in 2018. Despite intense pressure from shareholders, Hollub’s company, Occidental Petroleum (Oxy), beat out Chevron to acquire Anardarko Petroleum for $38 billion. In addition to the dramatic Anardarko deal, Hollub has also proven herself committed to exploration, pledging to make Oxy carbon neutral through carbon capture technology. While Oxy’s investment in a carbon-neutral future may seem at odds with its recent deal, the balance between exploitation and exploration that Hollub has struck will serve the company’s marketability well in the long-term. By investing in exploration as well as exploitation, under Hollub’s leadership, Oxy is securing a social license and, “regaining society’s trust to operate with the approval of employees, shareholders, and the broader public”.
Ultimately, the companies that succeed in 2020s will be those that prioritize learning and innovation: “Companies don’t fail because of changes in the environment, they fail because their leaders are either unwilling or incapable of dealing with said change.”
Author
Viewpoint Research Team