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Factors causing failure/success of a firm
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Introduction: A failing company is an entity whose profit rate is substantially lower than the average profit rate of its competitors. A company can lose its competitive advantage but still not fail. It may just earn average profits. Failure implies something more drastic. Failing companies typically earn low or negative profits – meaning the company is at competitive disadvantage. Companies which succeed in building a competitive advantage and sustaining the durability of their competitive advantage, can be considered as successful companies. On the other hand, companies that fail to build and sustain durability of their competitive advantage are considered as unsuccessful companies. Competitive Advantage: A Source of Success The four factors essential for building competitive advantage are: Efficiency Innovative capability Product quality Customer responsiveness These factors are determined by the strengths and weaknesses of an organization. The strengths of an organization depend on its: Resources Capabilities Competencies Resources include financial, physical, human and organizational assets of a company. Capabilities refer to skills in organizing, coordinating and putting resources to productive use. The main source of competitive advantage is superiority in creating values for customers. This is done by lowering costs, differentiating products so that high prices can be charged, and also by combining both of these methods. The benefits of superiority in creating values for customers include: Superior efficiency enables a company to lower its production costs Superior product/service quality allows a company to charge higher prices and lower its costs Superior customer service allows an organization to charge a higher price Superior innovation leads to higher prices in the case of product innovations, or it can lead to lower unit costs in the case of process innovations. These four generic factors are essential for building a competitive advantage. A company can achieve its competitive advantage by developing distinct and appropriate competencies that arise from resources and capabilities. Durability of competitive advantage depends on the level of barriers to imitation, capability of competitors to imitate a company’s advantage and the level of turbulence in environment. FACTORS CAUSING FAILURE OF MEDIVAC Background: To answer this question I will use MEDIVAC – a health insurance company established to provide health insurance cover. The company was the second biggest in Kenya and also the second biggest to go under after the fall of International Private Healthcare in 1996. The winding up of Medivac, barely a year and a half after that of the London-based International Private Healthcare (IPH) drew attention to the problems facing the industry which include unregulated medical charges, inefficient follow-up of patients and failure of health insurers to re-insure adequately to cover bad risks. The decision to wind up the company came after the company failed to transact business as some of its large debtors had failed to pay their dues on time. The winding up of the company came at a crucial time just as the company was planning to expand its operations. Scale of entry into the market: According to research, large-scale entry into a new business is often a critical precondition of new venture success. Although in the short run, large-scale entry means significant development costs and substantial losses, in the long run, it brings greater returns than small-scale entry. The reasons for this include the ability of large-scale entrants to more rapidly realize scale economies, build brand loyalty and gain access to distribution channels, all of which increases the probability that a new venture will succeed.
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