Implicit Indicators of Company Collapse

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Implicit Indicators of Company Collapse

— How did you go bankrupt? — Bill asked.

— Two ways, — said Michael. — First gradually, and then all at once.

Ernest Hemingway
Today, we find ourselves in a transformative market environment. The computing power of a modern smartphone dwarfs that of the computer that landed a man on the moon in 1969, and yet, many of the business principles we follow haven't changed substantially in the last decade or two.

In 2015, I initiated a Business Intelligence research project to investigate the high failure rate—often referred to as "mortality"—in entrepreneurship. On average, 7 to 8 out of 10 entrepreneurs don't make it past their five-year mark. While these numbers vary by country and industry, the trend remains consistent. To put it into perspective, imagine a hospital where only two or three out of 10 patients return home after treatment; the rest end up in a metaphorical graveyard. it is a grim comparison, but the data do not lie.

This high failure rate suggests a systemic flaw in the entrepreneurial landscape, rather than just a series of isolated issues. My research indicates that this systemic defect lies at the interface between entrepreneurs and consumers. Too often, entrepreneurs view their customers as merely revenue sources, ignoring the complexity of human factors. Milton Friedman, a cornerstone in the foundation of modern economics, stated 70 years ago that economists could overlook human elements when predicting market performance without repercussions.

We know better though, that ignoring such human elements is perilous. Customer relationships are as fundamental to any business as family relationships are to the home. Current business models and strategies often overlook the human dimensions, including emotional, creative, and spiritual aspects. Such oversights distort reality. Contrary to simplified "customer avatars," consumers are complex beings. Similarly, entrepreneurs aren't automated vending machines, merely dispensing products after a financial transaction. In both cases, the human factor is critical but often neglected.

Albert Einstein once said, "It is impossible to solve a problem at the same level at which it originated." This sentiment prompted my research eight years ago: What is the next level at which we can resolve the inherent issues in entrepreneurship?

Ultimately, I discovered that entrepreneurship is not a monolithic endeavor but a multifaceted activity comprising various "layers," which I term "contexts." These contexts are interrelated and often nested within each other. For instance, the context of a word exists within a sentence; the context of a sentence within a paragraph; a paragraph within a chapter; and so on up to the context of a book, which itself is influenced by the author's life, era, challenges, intended audience, and overarching goals.

Similarly, broader contexts envelop smaller ones in our physical world. A house exists within the context of a street, a street within a neighborhood, a neighborhood within a district, and so on up to a city, country, continent, and ultimately, the planet Earth. A single house, street, or neighborhood can never offer a complete understanding of an entire country.

1 Note to the publisher: if possible, provide a link to the fact that more information about this study can be read in the book "Business Incognita. How to push the boundaries of entrepreneurial thinking" (Alpina PRO Publishing House, 2023) and on the project website www.BizIQ.ai + picture of the book cover on the magazine page).

While some "layers" of entrepreneurial activity are readily apparent, others require additional knowledge and effort to understand. To illustrate my observations on the complexities and challenges businesses face, consider this metaphor:

Imagine an aquarium in which a goldfish resides. The goldfish can swim freely, control its speed, and choose its direction within this enclosed environment. It decides on the water temperature, which food to consume, and even which fellow fish to befriend or avoid. At first glance, the goldfish seems to possess complete autonomy, however, there's a catch: the aquarium itself exists within a larger ecosystem—the room of a house—that can influence the fish in ways it doesn't fully understand. Engrossed in its immediate surroundings, the fish is largely oblivious to external factors it cannot control. For instance, if the temperature drops significantly outside, the aquarium water will follow suit, endangering the fish's life.

Imagine a day when our goldfish decides to bask in the sunlight near the window-facing wall of the aquarium. Just as it swims toward the sunbeams, someone relocates the aquarium to the opposite, darker end of the room. Our goldfish, once confident in its autonomy, is confused. Its desired destination—the warm sunlight—now eludes it due to unforeseen changes in its once familiar environment.

In this metaphor, the aquarium symbolizes the business sphere where our entrepreneur (the goldfish) operates. it is a realm with boundaries defined at the outset of their venture. The fish believes it has complete control within this domain, seldom contemplating the influence of the world outside. This lack of awareness stems from its limited interaction with the external environment. Events occurring beyond the aquarium walls remain, for the fish, a subject of mystical speculation, leaving it unprepared for sudden and dramatic changes that could affect its well-being.

The legendary director of General Electric, Jack Welch, said: "If changes outside are faster than inside, the end is near."2 We can see this demonstrated in the issue with our aquatic dweller, with its lack of awareness about external changes, coupled with an inability to observe and analyze them. This flaw in perspective is not limited to goldfish—it extends to entrepreneurs as well.
As Peter Drucker aptly noted: "There is nothing more futile than to do productively what you don't need to do at all "3.

Back in 2015, I posited a central hypothesis to explain the high failure rate in entrepreneurship: "The primary reason for such high 'mortality' in business is likely that entrepreneurs often neglect a crucial task, the completion of which could ensure their survival."

From my perspective, issues like high employee turnover and poor financial performance are symptoms of this underlying problem, which manifests long before these red flags appear. Entrepreneurs who fail to adapt their businesses don't grasp a key point: the competitive landscape in today's digital economy is constantly evolving, eroding the value and uniqueness they've worked so hard to create. What value does a local consumer goods company hold when customers can easily purchase similar products from Amazon, eBay, or other global suppliers?

Entrepreneurs, like their products, can quickly become obsolete and fade into history, often without a happy ending.

Consider the transformation of a caterpillar into a butterfly. A butterfly is not merely an improved caterpillar but something fundamentally different, retaining some elements of its prior form. The same is true for consumer value; it needs to evolve into something fundamentally new.

Take photographers as an example. In the past, the number of photos taken was a measure of productivity, primarily because of the high cost of film-based photography. Now, when almost anyone can take professional-grade photos on their smartphones, the metric for productivity has shifted. it is now about new opportunities, like using machine learning for early cancer detection, rather than simply increasing the number of photos.

The perceived value of a product is relative to its context. Drinking water is more valuable in a desert than in a city; a disease cure is invaluable to the sick but not to the healthy. A surgical scalpel has more utility in an operating room than in a candy store.In entrepreneurship, the layer where a problem manifests may not be the layer where it originated. Addressing issues only at the surface level, where they become visible, is akin to treating recurring headaches with painkillers. it is a temporary fix that ignores the root cause and allows the problem to worsen over time.

In any entrepreneurial endeavor, activities can be broken down into three layers: 1) the operational layer, 2) the management layer, and 3) the meta-management layer, often called the "development layer." This last layer is crucial for the entire business ecosystem, as it is where customer perceptions are managed.

I want to highlight the difference between growth and development. Growth is a quantitative increase, whether in size or number. Development, on the other hand, is a qualitative improvement, encompassing enhanced abilities and competencies.

For instance, material wealth is a metric of growth, indicated by more money, a greater variety of goods, larger apartments, cars, closets, and refrigerators. However, the quality of human life serves as an indicator of development. Considering the rising rates of drug addiction, mental health issues, suicides, and divorces, it is clear that societal development is not necessarily in step with its material growth. Growth and development don't always go hand in hand. For example, a pile of garbage can grow, but it can't develop. Similarly, financial growth during inflation doesn't necessarily mean a business is actually developing rather than degrading. In the entrepreneurial context, I view development not as a quantitative metric—like increases in sales, customer service calls, or transactions, which are indicators of growth—but as a qualitative measure. This relates to the business's core purpose: enhancing the value it offers to consumers, from their own perspective.

Development and context are interconnected. Development occurs within specific environmental conditions that define an entrepreneur's available resources, capabilities, and limitations. Entrepreneurs often err by viewing their activities too narrowly, disconnected from the broader market context. This limited perspective can result in a short-sighted business strategy, sometimes extending only as far as two years.

The failure to manage the "meaning" of their activities—essentially, customer perceptions—can lead a company to lose its relevance, slowly or rapidly fading from the market. Once a business fails to capture consumer interest and attention, it faces degradation and eventual extinction. As G.S. Altshuller wrote, "Clearly, you can't hunt an elephant, a mouse, and a bacterium with the same weapon." Different challenges at various levels require unique tools and approaches. This is where "contextual analysis" comes in. It is a method for solving business problems in uncertain and chaotic conditions. Contextual analysis considers the specific circumstances in which entrepreneurial activities take place, adapting solution methods accordingly.

In essence, contextual analysis identifies what could be termed "categories of meaning" in any activity sector. These categories emerge from the interaction between the entrepreneur and the consumer, a topic I explored in depth in my book, "Business Incognita: How to Expand the Boundaries of Entrepreneurial Thinking." When an entrepreneur understands the "category of meaning" in their business, they gain a clear developmental direction. Within this framework, the core principle of their activities can be identified, allowing for a targeted development policy.

Understanding these three key factors provides the foundation for any long-term competitive advantage. An entrepreneur will only engage if hopeful about the future and confident that time is on their side. These elements also constitute the main subjects of research in contextual analysis. For the practical diagnosis of such subtle causes behind a company's failure, I employ a streamlined methodology aimed at early detection of issues in the developmental layer. This methodology is straightforward and comprises just four key questions:

1. What customer problem is your company solving?

2. How has the customer perceived this problem in the past, present, and future?

3. Can you articulate to the customer the origins and ongoing existence of this problem?

4. What solution can you offer for this specific problem?

Any ambiguity, uncertainty, or vagueness in the responses to these questions indicates that there are issues in the company's developmental layer—issues that may not yet be apparent to the management team. Much like in medical diagnostics and treatment, timing is of the essence. The sooner the problem is identified, the greater the likelihood of finding an effective solution.

2Scott Allison. The Responsive Organization: Coping With New Technology And Disruption. Forbes, Feb. 10, 2014. — https://www.forbes.com/sites/scottallison/2014/02/10/the-responsive-organization-how-to-cope-with-technology-and disruption/?sh=4f2af7c83cdd
Jaroslavs Kaplans

Author of the book "Business Incognita: How to Push the Boundaries of Entrepreneurial Thinking." Expert in the field of sustainable development of organizations and discovering new sources of growth. Developer of contextual market research methodology. Member of the International Association of Strategic and Competitive Intelligence Professionals (SCIP), USA.