Business failure

ACCA P5 Advance Performance Management

One of the reason companies fail is because they don’t account for changes. They fail because times after times in their life cycle they fail to adapt to incremental changes and/or they don’t keep themselves abreast with transformational changes.

Incremental changes: Small and continuous improvements in line with market/industry. E.g. introduction of new computerized systems, quality management

Strategic drift: Strategic drift is the tendency for strategies to develop incrementally (schrittweise) on the basis of historical and cultural influences, but fail to keep pace with changing environment.

Flux: Period where performance drops/stays at a level when market is saturated.

Transformational changes/demise: Change driven by market shift which requires repositioning itself in market by major ad-hoc changes to fit into new environment. Firms which cannot adjust themselves will fail. E.g. Kodak 

After discussing the reason for failure we look for a quantitative model for prediction of corporate failure.

Argenti’s  A Score Model (DEMISE)= (Defect, Mistake and Symptoms of failure)

It says failure process follows predictable sequence:

Ø  Defect: includes weakness E.g. loose internal control, weak governance, accounting deficiencies

Loose internal control	Weak governance	Accounting deficiencies
Weak skill balance in management	Single person as CEO and chairman	No budgetary control
Poor response to change	Autocratic chief executive	No cash flow plans

Ø  Mistake: result of defect E.g.  high gearing , overtrading  and big projects

Ø  Symptoms of failure: mistake eventually leads to visible symptoms of failure E.g. Creative accounting, week financial position, losing market share

Limitations of qualitative model are:

Ø  Based on judgement of expert

Ø  Information can easily be biased

Cultureand Strategy

ACCA Article: Business failure