The Australian Small Business Blog

Sunday, March 08, 2009

Mastering the Strategy of Failure

There is a saying:

“If you owe the bank $100,000, you are in trouble but if you owe the bank $100,000,000, the bank is in trouble”

In this time of economic turmoil, the same goes in business. If you are a small business that employs, say five people, and you lay off one, ie 20% of your workforce, apart for the unfortunate person involved, no one takes notice. If you however employ 5000 people and you need to lay off 20% of your workforce to stay viable, and they belong to a union who funds the government’s re-election campaign, one of two things will happen. If you play the game, you get a bailout. If not, you are vilified in the media.

So the obvious choice, particularly for the largest businesses is to take the money. That works for a while. However, taking the money means that you don’t have to take the hard decisions necessary to have a sustainable business. Almost certainly, one bailout leads to another, where each time the stakes are higher. The management soon realises, they can afford to take risks because they know the government can’t afford to let them fail.

Just look at the auto-manufacturers. Each job is subsidised to the tune of $300,000. Apart from the sheer volume of jobs, why would the government subsidise so many unprofitable jobs? Well if your electoral fund providers would lose their ability to fund your next campaign if the businesses failed, you have to keep paying subsidies, albeit with other people’s money.

The other question to ask is why would the managers of such a business accept these bailouts that, each year, make their businesses more and more unsound? Just looking at the abuse received by the boss of Pacific Brands, you can see why taking the money is easier. However, the management of these companies must know that this is just postponing the inevitable, and in fact putting their businesses in a more difficult position to compete against others who have made the hard choices. Isn’t this against the long term interest of their shareholders?

Yes.

So why does it happen?

This is where we see a difference between small business and large business. In small business, the owners run the business. In a large business, managers run the business on behalf of the owners. Owners know that if the business fails, they have failed and they must bear the brunt of the consequences. Managers on the other hand, know they can leave the business and get another job. All bailouts come with strings, and business owners know that these will erode the value of the asset that is their business. They lose flexibility and control. They become answerable to stakeholders who have different agendas than a profitable business.

Managers know they can still make a good income while the bailout occurs. Their life is easier when they don’t have to stand up to big government and unions. They also know that as the business continues to struggle, as it will with a lifeline that becomes a noose, the government must continue to bail it out. The business becomes worth nothing, and is effectively is turned into a nationalised company worth nothing on the market. The owners, being many and with little influence, given these businesses are largely owned by investment funds, who are more interested in just keeping the business afloat, just watch this car crash from the sidelines.

Businesses can last many years following this strategy of failure, but at some point, the price to avoid insolvency becomes too high even if your re-election depends on it. This will occur at time of economic stress and the government is running out of other people’s money.

While small businesses may resent this support of failure, why should they care? Because their own money is being used to prop up their largest competitors who will undercut them. However unless you owe the bank a $100 million, no-one is going to bail you out!

May Your Business Be – As You Plan It!

Dr Greg Chapman

Over to You. What do You Think? Post Your Comments Below.

Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success. Visit www.FivePillarsBusinessSuccess.com for your Free copy of my Mission Statements Made Easy Tool.

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1 comment :

Chris said...

I also know many businesses in our area that struggling to continue their operations. Yet, there were also some small companies that failed to cope up with the economic crisis and forced to shut down.

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