External Causes of Business Failure

External Causes of Business Failure

• External factors only account for about 20% of business failures.

Market Conditions

• Markets are dynamic and constantly changing.
• Businesses that cannot adapt to changing consumer tastes are more likely to fail.
• Retailers who failed to establish an online presence have struggled due to the growth of online shopping.
• The demand for coal mining has decreased as society is increasing its demand for energy generated by environmentally friendly production methods.
• Changes in market conditions can lead to price fluctuations, negatively impacting businesses if prices fall sharply.
• Oil producers are 'price takers' and must sell their output at the global market price.
• The price of oil fell from around US$103 in late 2014 to US$30 in 2016, causing a number of businesses in the oil industry to contract.

Competition

• Business rivals can cause failure through superior products, effective market analysis, or lower prices.
• Western manufacturers have been outcompeted by low-cost producers from China and other emerging nations.
• High street retailers have collapsed due to the increase in online shopping where the same products are cheaper.
• SpoonRocket failed because of a very crowded marketplace.

Economic Factors

• The general state of the economy can impact business success.
• Business failures rose after the 2008 financial crisis.
• Government economic policies, such as cuts in government expenditure and increased taxes, can contribute to business failure.
• Cuts in government expenditure in some countries, such as Greece, resulted in job losses
• A drop in disposable incomes leads to lower demand and hardship for businesses.
• Businesses that produce non-essential goods and services are more likely to feel the effects of an economic downturn severely.

Exchange Rates

• Businesses that import and export are affected by changes in the exchange rate.
• A business that relies heavily on the export market will suffer if the exchange rate rises sharply because overseas customers have to pay more for goods and services.
• In 2017, the Egyptian pound fell sharply after it was devalued by the government.

Interest Rates

• A sharp increase in interest rates could cause difficulties for some businesses.
• Those with large debts and those that depend on consumers using credit to fund their purchasing would be at risk.
• Rising debt often causes problems for businesses, and when interest rates rise, the burden of that debt may 'crush' a company.
• Between 2004 and 2012 it was reported that an average of 16,000 Indian farmers each year took their own lives due to bankruptcy or debts after taking loans from banks and other moneylenders

Government Regulations

• Changes in government legislation can lead to business failure.
• In 2014 a number of moneylenders withdrew from the market in the UK after the government passed legislation to control the supply of so-called 'payday loans'.
• Germany-based SolarWorld went into administration in 2017 because of cuts in government subsidies to the industry.

Supplier Problems

• A business may collapse if they are let down by suppliers.
• BMW encountered supplier problems in 2017, which meant it had to pause production in two factories.

Natural Phenomena

• Some businesses can fail due to natural occurrences such as the weather.
• Many farmers are extremely vulnerable to weather patterns that result in poor growing conditions.
• The lack of rainfall throughout South Africa in 2015/16 had, and will continue to have, a huge negative effect on South Africa's farm output.
• In 2016 olive growers in southern Italy were ordered to cut down thousands of diseased olive trees due to the disease Xylella fastidiosa.