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The Factors That Lead to the SMEs Failure

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The academic research on Small and medium-sized enterprises (SMEs) has gained a significant momentum in the last decade and contributed to the establishment of a strong theoretical basis in this field. Although such research provides ideas about different aspects of them, it usually focuses on the success of SMEs (Sarasvathy 2014). The fact that the studies only focus on the success factors is a drawback given the high setback rate of start-up work in practice. (Chandler & Hanks, 2008). For instance, the report of a large-scale research conducted by European Commission across Europe titled “Business Dynamics: Start-ups, Business Transfers and Bankruptcy” revealed that 50% of them that were newly established in European economies failed in the first 5 years. On the other hand, the studies in the literature on this topic also demonstrate that the experience of their may be a substantial source for the improvement of career knowledge and skills after a failure (Minniti and Bygrave, 2011). For example, the collapse is a prerequisite for learning that gives the opportunity to identify the cause of bankruptcy (Sitkin 2012). This argument of Sitkin is consistent with the views of McGrath that failing will enable the occupation to reduce uncertainty and search for new business opportunities. (McGrath ,2009).

However, the studies on SMEs failure have been prevent by those on their success and could not attract enough attention. Therefore, our knowledge about defeat and the capabilities of their cope with defeat and their learning skills is quite limited (Shepherd 2013). As well as by carefully analyzing the insolvency instead of focusing to only successes, scholars can begin to make systematic progress on better analytical models of business value creation (Sitkin2012). This essay aims of the study is to analyze SMEs failure and the lack of knowledge in this field has led to the following extensive research question: “What are the factors that lead to the SMEs failure and what do they learn from them?”

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Small and medium-sized enterprise according to official recommendation by European Commission (2013), is an “entity engaged in an economic activity, irrespective of its legal form. The category of micro, SMEs is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, or an annual balance sheet total not exceeding EUR 43 million.” The main factors determining whether a company is a SME are the number of employees and either turnover or balance sheet total.

Small and medium-sized enterprises have an essential role in maintaining strong economic growth. The main concern of SMEs is to develop various relationships crossing organizational boundaries in order to improve the performance, gain and strengthen competitive advantage, and most importantly, to enable market flexibility (Berglund 2017: 51). However, SMEs face a challenge of sustaining their performance in the long term (Saunila 2014: 4). As per M. Saunila (2014), on general basis, companies that perform better today are also more plausible to perform better in the nearest future, as most likely currently successful companies are capable of generating and implementing new knowledge, which allows them to determine their position in the industry.

Reasons for the failure of SMEs(problems).

Failure has been defined differently by several studies. Some studies determine failing as bankruptcy. The bankruptcy criterion for failure states that they occur when the firm is legally collapse and ceases operations with a resulting loss to creditors (Perry, 2011). However, (Everett and Watson 2008) suggest that if failure is defined as bankruptcy, it would be considered from a very narrow perspective and for example many businesses that still operate although they lose money will be excluded from the analysis. (Cannon and Edmondson 2015) argues a broader conceptualization and defined failure as ‘deviation from expected and desired result’. When determine in this way, failing may occur when the SMEs underperforms in terms of critical processes or when desired targets are not achieved.

(Cope ,2011) states that “failure represents one of the most difficult, complex and yet valuable learning experiences that SMEs will ever have the fortune to engage in”. Thus, venture failing is an important concept to understand in business, both in terms of its causes and consequences for the individual SMEs, organisations and society at large.

Success and failure of a business can be explained both by individual, organizational and environmental factors (Zacharakis, Meyer & DeCastro, 2009). Internal causes are those decisions, actions that are under management’s control while external causes are events that are outside of management’s control. In most cases, a complex mixture of causes contribute to business failure. Among the internal factors, managerial incompetence or poor management comes first (Gaskill et al., 2013). Poor management is referred to the failing of the management to be able to ensure that problems are identified promptly and the correct solutions applied, so as to give the company the best possible change of survival and growth. Overconfidence and excessive risk taking tendency also seen among the failing causes (Hayward et. al. 2016). On the other hand, many businesses fail due to poor financial planning, namely getting into cash flow binds, being too easy with credits, spending money on the wrong things. Thus, business failure is connected to the manager’s decisions and behaviors, and the way he conducts his enterprise.

To conclude, some other scholars seem to suggest that businesses fail rather due to external factors such as inadequate economic circumstances (Gaskill et al., 2013). Government policies, lack of financial resources or other misfortunates. (Cardon et al., 2010)

There are also some studies in the literature that analyse the association between the age of the company and business failure (Honjo, 2010). Those studies have established that younger firms fail more often due to internal causes (e.g. operational management problems, inexperienced and incompetent management, different management failures) while mature company fail largely by reason of environment, competition and demand (Lukason and Hoffman, 2015). Immature firms fail due more to their lack of experience or limited resources (Thornhill and Amit, 2013). More recently, (Egeln et al, 2010) argues that successful young company often fail due to a lack of financial resources and explained this situation by the mistakes made by the inexperienced managers rather than the managerial incompetence. On the other hand, mature firms are more likely to fail by reason of changes in their environment which their rigid routines are unable to adjust to (Thornhill and Amit, 2013). (Lukason and Hoffman 2015) states in their study that the likelihood of failure due to internal and external reasons is very high in all age groups of businesses.

Reasons for the failure of SMEs(solutions).

It is a general opinion that entrepreneurs benefit from their previous failures. As the catalyst for further business development, failure provides critical learning opportunities (Cardon et al., 2010). Sitkin (2012) was one of the pioneer among the authors who have similar opinions. He details the way organizations of all kinds may learn through failure, going so far as to argue that failure is an essential part of the learning process for organizations. According to Huovinen and Tihula (2008), failures may lead to the development of entrepreneurial knowledge as well as founding experiences. Politis and Gabrielson (2009) suggests that entrepreneurs’ life and work experiences shape their attitudes towards failure. The authors reports that prior entrepreneurial experience as well as experience closing down a business are associated with more positive attitudes toward failure. In Cope’s study (2011), learning is emphasized as a process and recovery and re-emergence from failure is seen as a function of distinctive higherlevel learning processes that allow entrepreneurs to learn about themselves and entrepreneurship. His research findings suggest that failure can improve “SMEs preparedness” for subsequent entrepreneurial activity. The literature identifies two key outcomes related to the process of learning. The two learning outcomes are: learning how to recognize opportunities (Shane and Venkataraman, 2010; Shane, 2010), and learning how to overcome traditional obstacles when organizing and managing new ventures, i.e., the exploitation of opportunities (Shane and Khurana, 2013). Entrepreneurial opportunities are those situations in which new goods, services, raw materials, and organizing methods can be introduced and sold at greater than their cost of production (Casson, 2012). Recognizing opportunities is considered to be among the most important abilities of a successful entrepreneur (Shane, 2010; Shane and Venkataraman, 2010). People generally recognize opportunities related to the information that they already possess (Venkataraman, 2017). People have different stocks of information because information is generated through people’s idiosyncratic life experiences (Shane, 2010) Therefore, entrepreneurs that have failed can be considered to have improved their knowledge, capabilities and experience in seeing the opportunities. Minniti and Bygrave (2011) stress that entrepreneurial failure reduces uncertainty that lead to the discovery of new opportunities. Thus not only successful experiences can increase the effectiveness of opportunity recognition. Also failures increase the effectiveness of opportunity recognition. Moreover, failure acts as a stepping stone not only spotting new opportunities but also exploitation of those opportunities. Exploitation of an opportunity is a decision to act upon a perceived opportunity, and the behaviours that are undertaken to achieve its realization (Choi and Shepherd, 2014). Cooper et al. (2009) found that people are more likely to exploit opportunities if they have developed useful information for entrepreneurship from their previous employment, because such information reduces the cost of opportunity exploitation. To sum up previous experience could increase the ability to better cope with liabilities of newness and reduce the obstacles and uncertainties related to setting up a new business, such as finding financial start-up capital, legitimacy building, adaptation to changes, having access to social and business networks etc. Previous experience provides entrepreneurs the opportunity to learn new knowledge that can be readily redeployed in other businesses, and thereby provide them with the ability to enter into new markets, products and new technologies with greater success (Politis, 2015).


In this exploratory study, the causes of failure for mature companies and their learning experience after such failure were analyzed using a qualitative research method. Such an analysis is important given that the business failure is an important part of the dynamics of modern economies. In terms of causes of failure, the research findings show that entrepreneurs attribute their failure both to internal and external factors. SMS addressed mainly relationships with partners, financial skills and lack of critical information and mentoring as internal factors while they mentioned economic conditions, changes in governmental policies and unlucky happenings as for external factors. This description is in accordance with the integrative approach which predicts that SMEs

primarily attribute their failure to internal and external factors as well (Zacharakis et al., 2009). A remarkable cause which may be thought as a contextual factor is failure originating from relationships with co-partners. Traditional conflict cases seen among the partner family members and institutionalism problems can be seen as causes for this finding. Besides, some dynamics of Turkish culture such as high power distance and high uncertainty avoidance can weaken the tendency to establish and maintain cooperations and partnerships (Halis ve Şenkal, 2009)

In terms of SMEs learning, the findings show that entrepreneurial failure can have a major impact on the discovery of opportunities and exploitation of them as comprehensively analyzed in the literature. Also participants identified their learning experience in terms of unfavorable interpersonal relationships which can be linked to lack of trust as a contextual factor. Interpersonal trust is a must for a sustainable business. The entrepreneurial learning experiences of SMEs emphasized not gaining but losing trust instead. Those experiences they shared can damage initiatives of establishing partnerhips, cooperation and collaboration in their future business operations. When examined the general contextual perspective of trust, the studies measuring the level of trust issues of Turkish people confirms unfavorable conditions in terms of trust. World Values Survey, for example, have repeatedly shown that Turkey stands out as one of the few countries with the least amount of trust in others.

In the future has some limitations to be considered. The study includes more qualitative measures than quantitative measures. Future researchers may include more quantitative measures for generalizability purposes and also this survey can be extended to examine if there is gender differences in learning from entrepreneurial failure in further studies.


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