The term "failure" in Webster's dictionary is defined as "the description or inaccuracy or inadequacy of funds in the short term." Generally, various terms such as company dissolution, organizational death, organizational collapse, bankruptcy and decline are used to describe business failure. An investment fails when a company or organization is unable to attract new capital and financial inflows to the company voluntarily in order to reduce debt, and maintain the financial cycle, and the main reason for this can be its management and ownership. There comes an end to what is called bankruptcy, which is stopped due to the judicial and legal stages of the operation.
There is no single definition for business failure in the theoretical literature. In fact, there has not been any general consensus among researchers and theorists on what organizational failure is, how it occurs, and what the consequences are (Ropega, 2011).
Generally, various terms such as company dissolution, organizational death, organizational collapse, bankruptcy and decline are used to describe business failure (Cardozo & Borchert, 2004).
In the literature, however, some definitions for failure have been proposed by scholars:
- No survival of business for any reason and official announcement of the company (Watson, 2003).
- Ulmer and Nielsen (Ulmer & Nielsen, 1947) have defined business failure as: accepting failure in order to avoid further costs.
- In this regard, Cochran (Cochran, 1981) also argued that failure of a business could mean the termination of a business to maximize its utilization in a short period of time.
- Freeman et al. (Freeman, 1982) describe organizational death as follows: An organization is dissolved when the usual actions that stabilize its structure, conserve resources, and maintain the loyalty of its members are stopped. A union that bears a license and has a national office, but there is no worker who concludes a contract, no member, and no organizer is a dead union. Similarly, a company that has acquired an organizational identity but has no employees other than its head office staff, is no longer a company.
In Iran, the Ministry of Industries and Mines, Agricultural Jihad and Cooperatives consider small and medium-sized enterprises as industrial and service units with less than 50 employees (Ahmadpour & Moghimi, 2006). Moreover, according to the studies conducted by Business Research Center and the Small and Medium Industries Development Organization and the current laws in Iran, a group of industrial enterprises with less than 50 employees are among the small and medium enterprises. According to the latest definition of the Small Industries and Industrial Towns Organization, small industries are those that have between 5 and 50 employees and large industries are those that have more than 50 employees.
In a study entitled "Key Factors for Small and Medium Business Failure, A Comparison between the UK and Nigeria", Ihua (Ihua, 2009) compared small and medium business failure factors in the UK and Nigeria. The data of this study were collected through a combination of questionnaire information and semi-structured interviews with 45 industry experts from the two countries. The results showed that poor management in the UK and unfavorable economic conditions and inadequate infrastructure in Nigeria are the key factors in the failure of small and medium-sized businesses.
Ropega (Ropega, 2011) conducted their research on the causes and signs of failure in small and medium enterprises in Poland. The research was funded by the Polish Ministry of Science and Higher Education to examine the entrepreneurs’ beliefs on the signs and causes of failure of small and medium-sized businesses. Fields suggested in this research as reasons and signs of failure are: quality of management or owner-manager attitude, financial field, marketing and distribution field, human resources, and technology and innovation field. For each designated field, potential causes of business failure have been identified.
Saeedi and Afshari Joo (Saeidi & Afsharijoo, 2010) in an article entitled “twelve main causes of companies’ bankruptcy by reviewing the literature and verifying large and small companies” could categorize the most important reasons for company failure based on their significance. These reasons, based on their importance, include: inefficient management or mismanagement, lack of necessary investment, lack of long-term financing, lack of proper understanding of customer needs, poor marketing and sales techniques, national economic activities, poor cash flow, lack of proper understanding regarding competitors, over-credit development, lack of business knowledge and experience, personnel problems, lack of specialists, and unintended natural disasters.
Arasti (Arasti, 2011) conducted their research under the title of empirical study on the causes of organizational failure in Iran’s situation with the aim of identifying the main causes of organizational failure based on empirical study in Iran. The statistical population of their research consisted of 150 owners-managers; out of the questionnaires that they randomly sent to 82 owners-managers, 51 questionnaires were completely filled out. The results of empirical research on owner-manager organizations showed that the most important reasons for the failure are: lack of competent managers, lack of support from banks and financial institutions, insufficient economic scope, and poor government policies. In addition, this study showed that the reasons for failure vary depending on the type of industry and the gender of the manager.
Jim Everett (Everett, 1998) in his study entitled “The Impact of Macroeconomic Factors on Small Business Failure” showed that economic factors are related to the failure of small businesses in a rate of 30% to 50%. As it was expected, the failure rate was associated with interest rates (where failure was defined as bankruptcy) and unemployment rate (where failure was defined as loss of ownership).
Small businesses can fail for a variety of reasons, but those which are less than 3 years old are more likely to be affected by issues related to finance, demand forecasting, management, marketing, start-up capital, strategy and planning. No matter how solid and strong a business owner’s (owners’) idea is to start the work, availability of resources, experience, and skills needed to successfully manage and run a business seems critical (Smallbone, 2015).
Arasti et al. (2012) conducted a study entitled “Identifying the impact of individual factors on the failure of newly established Iranian businesses”. The statistical population of this research was small start-ups in the industrial sector. They first obtained 4 groups of individual factors including motivation, ability, skill and personality traits by conducting a qualitative study and analyzing 10 semi-structured interviews. Then, by evaluating these factors in the form of a questionnaire in a sample of 158 unsuccessful small companies and analyzing the response of 52 respondents, they concluded that lack of crisis management skills and lack of marketing, financial and human resource management skills are the main factors affecting failure of new small businesses in the industrial sector (Arasti et al. , 2012).
Today, the importance of entrepreneurs and small and medium-sized businesses in the development of national and regional economics has been confirmed for several reasons, including the role of entrepreneurs as agents of creating innovation, sustainable employment and also a factor of increasing competitive advantage (Audretsch et al. , 2012). Such a situation causes the macro-policies of countries to support the creation and development of small businesses. On the other hand, small and medium-sized companies, despite having strengths such as flexibility and adaptability, face more problems and difficulties compared to larger companies. These weaknesses need appropriate answers. Research findings show that the failure rate of small and medium-sized businesses in the first 5 years of operation is more than 50%.
In the United States, about 45% of start-ups last only 8 months, 25% reach 5 to 6 years, and about 20% over 10 years.
The results of Freeman (Freeman, 1982) and another study conducted between 1955 and 1975 showed that half of large corporations failed in their first five years, and less than 45% of organizations formed in 1975 were remained. This indicates that small organizations have a higher degree of decline and failure compared to large organizations (Samuel, 2011). Small organizations have less chance of survival than large organizations. The viability of large organizations stems mainly from the strength of the major participants (such as members, employees, and employers) as well as the volume of their financial assets. In other words, these organizations have the advantage of breadth. Large organizations benefit from higher survival rates due to abundance of resources, public legitimacy, political relations, and economic power. The power of large organizations enables them to absorb real losses better and be more resilient to external threats compared to the smaller organizations. For example, large companies are unlikely to collapse even when they fail.
In Iran, on the one hand, there is a strong need to use the achievements of small and medium-sized businesses, such as entrepreneurship, innovation development and national competitiveness. On the other hand, due to the unfavorable business environment for small and medium-sized businesses to flourish, today we see a high failure rate of existing businesses, especially start-ups, both implicitly and explicitly. In such circumstances, identifying the roots and causes of these failures is critical in order to empower and prepare start-ups, small and medium businesses, for survival and excellence. According to the above-mentioned debates, the following research concerns are raised:
What individual factors affect the failure of small and medium-sized enterprises?