Why do so many businesses fail? Researchers say it’s a matter of industry timing

Business longevity depends on industry state during inception of company Pexels (Thirdman)

What determines a businesses long-term success? Some researchers argue it comes down to industry timing.

Aside from market appetites, company productivity, marketing reach, or any other factors that weigh into a business’s impact and durability, a new study found that the longevity of a company depends on the state of the industry during its time of inception – and the general environment in which it grows.

According to D. Carrington Motley, an instructor in entrepreneurship at Carnegie Mellon University, the founding conditions of a company could weigh more on its long-term trajectory than changes in the market.

“A venture’s performance following environmental change depends on its internal processes,” he said in a press release. “Environmental conditions at a business’s founding shape those processes, and they quickly become cemented and embedded in beliefs about how to operate.”

Although understanding industry norms and trends has long been held as a key to entrepreneurship success, Motley and fellow researchers found that social, economic, and technological changes make industry knowledge or prior experience increasingly less relevant. This is because teams need to adapt to developments that previously-stable industries were unprepared for.

Motley and other researchers examined the performance of more than 1,000 ventures, all of which were founded from 1960 to 2011. These businesses specialized in a wide range of industries – from energy and utilities to agriculture – and the research team assessed data from the Bureau of Economic Analysis to measure how active and changing different industries were when each company started. On top of this, the researchers used alumni survey data to understand how long businesses lasted.

The research found that companies achieved the most success when changes in the market match the conditions they started in. But the study also found a stabilized industry environment can make a company less likely to succeed if the team is accustomed to perpetual change.

Wesley Koo, another co-author of the study, said “in more predictable environments, being more aggressive can produce better outcomes.”

This could come down to risk-aversion.

“The risk of untested assumptions is less, so continued use of risk averse processes produces fewer benefits and may detract from a venture’s ability to respond to opportunities.”

The study found that “slower decision-making” was a key factor in the long term success of a company.

When a business started in a stable industry, they might be less inclined to make quick decisions when that industry starts changing rapidly, according to the press release. When a company starts in a more volatile industry environment, a company might be more adaptive to continued changes.

The authors argue that entrepreneurs must regularly evaluate how their business approach adapts to the industry, while abandoning industry biases that may not reflect current changes.