Common Mistakes of Bad Management
It’s generally accepted that most business failures result from inadequate management. So what do business owners and managers do wrong?
Around 65-90% of business failures are due to internal issues – often referred to as weak or bad management, according to Donald B Bibeault in his book Corporate Turnaround – How Managers Turn Losers Into Winners!
In my previous blog – Why Do Businesses Fail? I discussed management styles and structures which inhibit effective business management.
I’d now like to take that one step further by discussing the common mistakes that business owners and managers make.
The majority of mistakes occur because management either fails to take action or takes inappropriate action.
Here are some common examples:
- Failure to keep pace with a changing environment – I once worked with a manufacturing and wholesale business which continued to produce a range of products long after consumer demand had changed. The result was a build-up of inventory, which then needed to be sold at less than cost to free up working capital.
This could have been avoided if management had implemented a market intelligence strategy, which would have identified the change in consumer demand, in time to develop a replacement product.
The internal environment of any business is also susceptible to change, particularly when it comes to technology. Take for example a car parts manufacturer whose production processes have failed to keep pace with technology.
When you combine this with a sales oriented management team, the result is a business that cuts prices to remain competitive, despite a continual increase in repair bills as its machinery ages. The outcome – the more the business sells, the less money it makes.
- Failure to control operations – This is often the root cause of management’s inability to take action. It relates to the quality and timeliness of information available to assist management in decision making. If management don’t understand what’s going on in their business, how will they know when to take action?
To effectively control operations management needs access to reliable and timely information including KPIs, product costing, overhead absorption rates and fixed overheads. These often form the basis of a weekly/monthly management reporting pack; along with profit statements, balance sheet and appropriate financial KPIs.
Being able to identify when action needs to be taken is only the first step in effective business management. The second step is to ensure that action taken is appropriate.
Two of the more common mistakes made by management are:
- Over-expansion – Bigger isn’t always better. Let’s go back to the car parts manufacturer, who’s failure to modernize their plant led to a downward spiral in margins.
Rather than increase sales, which further decreased profits, a more appropriate strategy might have been to gain a thorough understanding of the product costing and cull lower margin products, thereby generating a larger profit from a smaller product range.
Contrary to popular belief, diversification isn’t always the right risk mitigation strategy either.
Time and again I’ve seen successful businesses failing on the back of poor diversification strategies. For example: an automotive parts retailer who diversified into shampoo, a construction business which purchased a winery and scientists who branched out into fast food.
The key to successful diversification lies in genuinely understanding the new business and ensuring that it is either akin to original operations, or managed by an appropriately experienced and knowledgeable management team.
- Over-leverage – Once entered into, finance agreements can be very difficult to exit or renegotiate. It’s imperative that management make the “right” decision when considering expansion and diversification strategies. The capital decision-making process has to be thorough; including full financial modeling of how the expansion will add to the bottom line, and not take away from it. This can be achieved through implementation of a rolling 3-way forecasting process and regular business strategy forums to keep management focused on planning for the future.
How to reduce the risk of business failure
Business owners and managers can significantly reduce the risk of business failure by following these guiding principles:
- Accept that their business operates in a changing environment (as all businesses do) and be alert to inevitable changes
- Implement appropriate reporting processes so that need for change is identified in a timely manner
- Ensure that action taken is appropriate to the issue
- Understand your cost base, the margins by product and (before you plunge in) spend time doing your homework to ensure you give the new investment every chance of success.
Elizabeth Mawby was a former Client Director at Vantage Performance, Australia’s leading business transformation and turnaround firm – solving complex problems for businesses experiencing major change.