A Dive Into Root Causes
In the vibrant ecosystem of American entrepreneurship, post launch business failure is an all-too-common experience. The statistics are sobering: about 20% of new businesses fail within their first year, 50% within five years, and most fail within ten years. This is true in spite of many resources available to businesses—expert advice, government funding, educational programs, business incubators—the failure rate remains consistent and stubbornly high.
This raises a critical question: Why do businesses continue to falter given the extensive support systems designed to create good businesses in the first place?
Social Acceptance of Business Failure
When analyzing why businesses fail, one will encounter a standard list of twenty or so commonly accepted reasons. Over time, it seems to us that these reasons have taken on an unexpected and defacto social acceptance as a reasonable cause for failure.
While there are reasons that are clearly beyond someone’s control, such as economic changes in the world, new technology disruptions, pandemics, and a few more, the remaining reasons listed do not pass the same muster test of being uncontrolled.
Look at a couple of the other main reasons listed for failure: lack of market demand, insufficient capital, poor management, and fierce competition and it is easy to see that those are all controllable reasons. Which means somewhere someone made, or failed to make, good decisions. We know of entrepreneurs and business leaders who—having been warned about those possible situations—then did nothing about them. We’re confident they think … that won’t be me. It’s as if the expectation of being the entrepreneur in society is to take large risks and it is okay to fail.
And, for some unknown reason, it appears that society readily accepts failures as a matter of fact, as something natural, something that “just happens” in life, and if it happens to you, well, society says, “That’s too bad.” What strikes us as odd is that further thinking about that outcome simply stops, as if it were inevitable.
Evidence of this is the high business-failure rate and the reduced levels of support systems to teach, grow and reduce risk in existing businesses. We see many more resources (time, money, know-how) focused upon the startup and a successful launch than on small and very small businesses. And sadly, after a startup launches with well wishes and good luck messages, the helping infrastructure tallies up the new jobs created and claims it as their success metric.
Critical Thinking and Root Cause Discovery
To unearth the true reasons behind controllable business failures, a critical-thinking approach is essential. This process involves first separating out uncontrollable from controllable failure reasons. Uncontrollable failures are external to the business and when they occur there is little the micro and small business can do to fully counteract them. Interestingly, initial problem indicators to a small business are within the list of the controllable causes. Controllable failures typically stem from internal processes and business decisions. These are places where business leaders could potentially intervene if they were aware of their vulnerabilities.
We utilized critical thinking tools such as the Ishikawa (fishbone) diagram and the 5-Why analysis to seek failure reasons back to their root causes. Our 5-why analysis suggests that, as a whole, we are focusing on the wrong solutions to business problems.
By asking 5-Why questions, an analysis of the “insufficient capital” example does not resolve to a root cause—it instead demonstrates circular thinking.
According to lean principles, when a 5-Why diagram becomes self-referencing, it means one has listed symptoms, not causes.
And that means society has mistakenly attributed symptoms as acceptable reasons for business failures!
As a simile, it is like going to a doctor because one has pain in their leg. The patient wants the pain to go away in their leg and focuses upon that issue, usually singularly. But when a looks at the situation, they realize the leg is part of a larger system. They work towards making an accurate diagnosis and they often do so with objective tests to discover the real cause out of many possibilities. In this example case, it could be a pulled muscle, over-use, injury, or a pinched nerve in the spine.
Our discovery from these analyses revealed to us that many business failures can be traced to a lack of proper planning (taking unnecessary risks and uninformed short cuts, as examples). And the “Why?” answers for those reveal two fundamental root causes: “Not Knowing” and “Not Wanting to Know.”
Diagnosing the Root Cause: A New Approach
The implication is that a new diagnosis method is needed before taking corrective actions for business symptoms to find root causes. And support infrastructure needs to be better buttressed to reduce business failure rates.
And we know from our experience, corrective actions need to focus on people; what they know and don’t know, what they are doing or not doing, and then tie that thinking and behavior back to corrective action that the business needs. Only then can a better decision be made to utilize existing infrastructure to focus upon the vulnerable business process.
In a business context, this means that solutions need to be targeted and informed. When a business faces a challenge, we know leaders will tend to do, have a bias toward, what they already know—whether that works or not. A recipe for failure! Albert Einstein is quoted, “We cannot solve our problems with the same thinking we used when we created them.” And since a leader is a function of themselves, if they created the problem in the first place, they almost cannot solve it by themselves. The solution needs to be obtained from an external (outside the system) diagnostic source. We believe a business diagnostic is needed, based in systemic and interdependent good business processes, as a sort of diagnostic test, to provide information on where to act next. This lean approach involves identifying the vulnerable business process, which can then be improved.
Building a Business: Informed Decisions Over Hard Work
Building and growing a business is undoubtedly challenging, even when decisions are well-informed. The real challenge arises when decisions are made without a clear understanding of underlying business processes and their vulnerabilities. Hard work alone is not a panacea; it must be coupled with informed decision-making and a true understanding of the business’s current state.
For businesses entrenched in failure, the sunk-cost fallacy often complicates matters. This cognitive bias can lead leaders to continue investing in failing ventures because of thinking they don’t want to lose the resources already sunk into them. Recognizing when a business is on a path to predictable failure allows leaders to make more strategic decisions, potentially redirecting efforts towards more promising ventures.
Conversely, a customized business diagnosis—through comprehensive root cause analysis—can reveal opportunities for accelerated success. By addressing the real issues, businesses can optimize their process performance in ways that lead to genuine improvements and sustainable growth.
The Power of Informed Decision Making
Entrepreneurs, leaders, and employees dedicate tremendous effort to building successful businesses, and their hard work deserves recognition. However, success does not solely hinge on the amount of effort put in—it requires informed decision making and a deep understanding of the current state of their business processes.
Our experience is that listening—through an open culture of problem solving—to the people who run your business processes is the right way to go. If you don’t quite have that yet, or are too small to ‘know everything’ per se then a business diagnostic may be right for you.
Success in business is as much about identifying and addressing the core issues as it is about hard work. By embracing a diagnostic approach, businesses can avoid predictable pitfalls and pave the way for genuine, sustainable success.
Experience the difference a powerful business diagnosis provides!
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