Increasing the survival odds of new business

By Dr Vince Giuca

In general, owners of new businesses are constantly under pressure to perform as they establish basic organisational structures, build relationships and grow their customer base. The learning curve can be very steep as they grapple with numerous day-to-day issues, from the trivial (e.g., what office supplies to buy) to the strategic (e.g., product pricing).

Therefore, it is not surprising that new business survival rates are not great, with less than 50 per cent of new businesses surviving beyond three years (see New business survival).

Liabilities of Newness

In 1965, Stinchcombe wrote an influential article (Social structure and organizations) arguing that organisational mortality rates decline as they age (i.e., liability of newness). Since then, studies have be conducted that empirically support this proposition.

Stinchcombe highlighted four challenges that make new organizations vulnerable and these are summarised as follows:

  • New roles within organisations are created and these involve a considerable amount of new learning. In other words, people brought into new created roles have a steep learning curve.
  • Organisational structures need to be created around the new roles with associated rewards and sanctions. Inefficiencies creep in as these structures are developed and bedded down.
  • People within new organisations are often not known to each other and it takes time for relationships based on trust to form. Likewise, relationships with customers, suppliers and other stakeholders may require some time for these to become stable.
  • New organisations also lack sets of routines that are necessary for organisational efficiency.

Focusing on Stinchcombe’s four challenges, sooner rather than later, will go a long way in helping with business success. This will not guarantee success, but addressing each challenge will make the business more resilient and more capable of developing into a larger and more profitable entity.

Single Versus Multiple Owners

One factor that can make a big difference is whether the business is operated by single or multiple owners. Data from the Australian Bureau of Statistics suggests that businesses operated by single owners, compared to multiple owners, are more vulnerable and have a high mortality rate in the first three years following start-up (see New business survival).

Businesses with two or more active owners not only have a higher rate of survival, but are likely to grow faster and be more profitable. Owners have ‘skin in the game’ and, therefore, have greater incentives to make their businesses succeed (at least according to the rationalists’ world view).

Paradoxically, partner owners in any business are also susceptible to Stinchcombe’s four challenges. They must define and structure their own roles, rewards, responsibilities and authorities. Their own relationships, within the boundaries of the new organisation, must also evolve into relationships of trust, and routines need to be developed so that the partners can operate efficiently and effectively.

Having addressed these challenges, partner owners will be in a stronger position to extend their model to other organisational stakeholders (i.e., employees, customers and suppliers). If not addressed, then the problems can multiple into chaos.

References

  • Australian Bureaus of Statistics (2014) Counts of Australian Businesses, including Entries and Exits, June 2009 to June 2013, Catalogue Number 8165.0
  • Stinchcombe, A L (1965) Social structure and organizations. In March, J G (ed), Handbook of Organizations, 142-193. Chicago: Rand McNally & Company.

ABOUT THE AUTHOR

Vince Giuca is the Founder and Executive Director of Partners-in-Business Institute (PiBI), established to assist executives, managers and entrepreneurs with human resource management, workplace conflict, team and organisational development, partnership relationships and business negotiations.

Vince completed his PhD on ‘The changing role of the entrepreneurial founder in emerging fast-growth firms’ in 2012.

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