Failure is normal. Failure happens. We may think of only one kind of failure – catastrophic failure that gets everyone fired – but failure is multifaceted, nuanced, and occurring right now in each of our organizations.

Failure is also not a “bad” thing. Failure is a mark of leadership and innovation in pushing the boundaries of what is possible and profitable when scaling from pilots to global programs.

6 Steps to Reduce Failure Risk

Leading over a decade of Fail Festivals for company events has taught us that failure is not predetermined. Failure happens when organizations attempt innovation without well thought through processes.

How can teams can actively work to reduce the probability of failure? Here are six simple steps that companies can use to mitigate failure and improve the opportunity for success.

1. Before action report

Teams should think through all the possible results that could happen from the project. Then they can document which outcomes they should actively work to avoid or welcome.

This process can help companies understand why they should welcome the experiment and start teams on the learning journey that will result from the resource investment.

2. Making a success spectrum

The potential outcomes developed in the Before Action Report can be sorted to see all the ways the project could have positive impact, and at what points can the team claim a success.

Companies can realize that success does not need to be binary. Reaching 50-90 percent of the experiment’s objectives can still be a success, even if the effort does not reach 100% of their goals.

3. Open sharing sessions

During every phase of a project, teams should have risk-free conversations on what isn’t going right, not to assess blame but to mitigate problems early and often.

This opportunity to increase psychological safety within teams can be an everlasting outcome of the experiment, and lead to trust and innovations well beyond the specific experiment.

4. Codifying permission to fail

Leadership can develop a fail-positive organizational culture where everyone – from the CEO on down – admits to failure and discusses what they learned from it.

Innovation – and its failure corollary – can only happen when both are discussed openly at all levels of an organization. In fact, a minimum level of failure is a proxy for organizational innovation.

5. Creating innovation funds

Companies can budget and time for no-stress experiments – something like a 10% of projects by number or value.

This is large enough to get staff attention and motivation, new enough that investors will want to support it, but small enough that failure of any one project, or even groups of them, will not cause undue stress for corporate leadership.

6. Publishing failure reports

Companies can share results of experiments – good and bad – across the organization and publicly.

Teams need to talk about failure. Mistakes that get covered up do double harm: first at the original failure, and then again every time someone else makes that same mistake – because they couldn’t learn from the first error.

Failure is a mark of leadership, innovation, and risk-taking in pushing the boundaries of what is possible and profitable in scaling ideas from pilots to global programs. We should be demanding a minimum level of failure as a proxy for how innovative an organization is.

Why ask for failure to ensure success?

In the research paper, Innovation, exnovation and intelligent failure, the authors argue that success can foster decreased investigations, increased complacency, risk aversion, and destructive homogeneity. Conversely, modest levels of failure can promote a willingness to take risks and foster resilience-enhancing experimentation.

Success and failure are therefore siblings.  An inability to learn from experience – and particularly failure – can doom a company to repeat the same mistakes over and over without improvement.

7 Steps for Intelligent Failure

They also define seven steps companies can use to reduce the risk of innovation failure and increase the probability of pilot success. Key ideas we can all learn from to keep from staring in the next Fail Festival.

1. Well-planned, thoughtful innovation

The first step for any good innovation is to invest in careful planning of what will be done and the expected outcomes.

For example, a Before Action Report can help document all the potential outcomes.  This the opposite of post hoc rationalizations of why something was started, after its already in process and potentially failing.

2. Documented uncertain outcomes

An experiment, pilot, or test, are all by definition leading to multiple uncertain outcomes.  However, they don’t need to be unknown outcomes.

Doing a Before Action Report and creating a Success Spectrum can document and sort all the ways the project could have positive impact, and at what points can the team claim a success.

3. Clear underlying assumptions

Don’t just document the process and potential outcomes, also be clear about the underlying assumptions and background context of each innovation investment. Ask questions like:

• Does the experiment require teams to follow or flout rules?
• Are there unaccounted resources, like volunteer team members?
• Can this innovation only exist in specific enabling environments?

4. Small Scale Innovations

A key aspect of intelligent failure is to make sure that companies budget and time for no-stress experiments that will not harm the organization. Something like a 10% of projects by number or value.

This is large enough to get staff attention and motivation, new enough that investors will want to support it, but small enough that failure of any one project, or even groups of them, will not cause undue stress for corporate leadership.

5. Experiments Relevant to All Teams

Companies need to make sure the context of the innovation is familiar enough to the relevant teams that it can create effective diagnosis of the failures and teams can adopt the lessons learned.

This is why I always design Fail Festivals to be organizationally diverse, bringing in staff from different levels and backgrounds so that each participant can see themselves in at least on presenter.

6. Asses early and often

I really like the intelligent failure point of assessing the innovation early and often at specific checkpoints. These pause-and-reflect sessions should be identified in advance to allow teams to quickly identify whenever the activity is diverging from the original plans.

Not all divergence is bad, and not every change means failure. If a company did a Before Action Report, then these inconsistencies can be anticipated and mitigated in real time.

7. Lessons learned are quickly shared

Along with assessing pilot projects early and often, organizations can develop a culture of innovation by talking about how teams learn from failure.

The goal is to establish failure as healthy for a company and get past thinking of failure as a catastrophic event. Failure is nuanced and failure – a sibling of success – requires risk tolerance for innovation.

A decade of Fail Festivals revealed multiple reasons why businesses fail every year.  Failure reasons that are also present in business and organizational studies, widely discussed in academic literature, and detailed in business case studies.

The reasons for annual business failures range from minor missteps to catastrophic collapses. The failures also form the basis for 10 reasons for business failure in 2024.

Want to avoid business bankruptcy from one of these failures? Then invest in a Fail Festival today!

10 Reasons Why Businesses Will Fail in 2024

We considered ongoing and emerging trends, technological advancements, economic conditions, and shifts in consumer behavior to predict the specific reasons why businesses will fail in 2024.

1. Digital Transformation Lag

Businesses that fail to keep up with digital transformation and technology adoption might find themselves outpaced by competitors, resulting in operational inefficiencies and lost market share.

Example: Blockbuster failed to adapt to the digital streaming trend, allowing Netflix and other streaming services to capture the market for video rentals.

2. Cybersecurity Vulnerabilities

With the increasing reliance on digital platforms, businesses that do not invest in robust cybersecurity measures could be exposed to data breaches, cyber-attacks, and significant financial and reputational damage.

Example: Equifax suffered a massive data breach in 2017 due to inadequate cybersecurity measures, compromising the personal information of millions of consumers.

3. Supply Chain Disruptions

Ongoing global uncertainties, including geopolitical tensions and climate change, may continue to cause supply chain disruptions, impacting businesses that are not diversified or resilient in their operations.

Example: Toys “R” Us struggled with supply chain issues and inventory management, contributing to its inability to compete effectively with online and big-box retailers, leading to its bankruptcy in 2017.

4. Inflation and Economic Volatility

Persistent inflationary pressures and economic instability could erode purchasing power and consumer demand, particularly impacting businesses in sectors sensitive to economic cycles.

Example: Once a retail giant, Sears failed to adapt to changing economic conditions and consumer shopping behaviors, leading to its decline and bankruptcy in 2018.

5. Remote and Hybrid Work Models

Companies that do not adapt to the evolving expectations of the workforce regarding flexibility, remote work, and work-life balance may struggle to attract and retain talent.

Example: In 2013, Yahoo famously ended its remote work policy, a move criticized for being out of touch with evolving workplace trends, contributing to its struggles in retaining talent and staying competitive.

6. Environmental and Sustainability Challenges

Businesses that ignore sustainability and environmental impact may face regulatory penalties, consumer backlash, and increased operational costs.

Example: Volkswagen faced severe backlash and financial penalties due to the emissions scandal in 2015, where it was found to have cheated on emissions tests, highlighting the risks of ignoring environmental responsibilities.

7. Changing Consumer Trends

Failing to adapt to changing consumer preferences, such as the demand for personalized experiences and ethical products, could lead to declining sales and brand relevance.

Example: Kodak failed to pivot effectively to digital photography, despite inventing the first digital camera, as it clung to its film-based business model for too long.

8. Poor Financial Management

Businesses that do not effectively manage their finances, including cash flow, debt, and investment in growth opportunities, may face liquidity issues or bankruptcy.

Example: Enron collapsed in 2001 due to fraudulent financial practices and poor financial management, marking one of the most infamous corporate bankruptcies in history.

9. Regulatory and Compliance Failures

New regulations, particularly in technology, privacy, and environmental sectors, could pose challenges for businesses that are not prepared or compliant, leading to fines or operational restrictions.

Example: Google decided to shut down its social networking platform, Google+, in 2019 after failing to disclose a data leak affecting hundreds of thousands of users, showcasing the impact of mishandling user data and privacy issues.

10. A Single Revenue Stream

Companies heavily reliant on a single product, service, or market may be vulnerable to shifts in consumer demand, emerging competitors, or market saturation.

Example: Blackberry failed to innovate beyond its initial success with secure email and messaging devices, resulting in a significant loss of market share to smartphones running on iOS and Android platforms.

10 Reasons Why Businesses Fail Every Year

Business failures occur every year. Failures can occur in business organizations at various levels, often categorized by their impact, scope, and the stage at which they occur.

Below are 10 reasons why businesses fail year after year.  Each failure is timeless – the source of business failure for centuries.

1. Individual Performance Failure: This occurs when an individual employee fails to meet their performance goals due to lack of skills, motivation, or understanding of their role. Examples: your peers, anyone fired for non-performance.
2. Team Dysfunction: When a team fails to collaborate effectively, it can lead to missed deadlines, poor quality of work, and conflict among team members. Examples:
3. Project Failure: A project may fail to achieve its objectives due to poor planning, inadequate resources, or unrealistic timelines, leading to wasted efforts and financial losses.
4. Operational Inefficiency: This level of failure involves the day-to-day operations of a business becoming inefficient or costly, often due to outdated processes or technologies.
5. Financial Mismanagement: Poor financial management, including inadequate budgeting, excessive debt, or fraudulent activities, can severely impact a company’s viability.
6. Strategic Failures: When a business fails to adapt to market changes or chooses the wrong strategic direction, it may lose its competitive edge or miss out on key opportunities.
7. Leadership and Governance Failures: This occurs when poor leadership or weak corporate governance leads to a lack of direction, unethical behavior, or decision-making failures at the highest levels.
8. Crisis Mismanagement: Inadequate response to a crisis, such as a public relations scandal or a natural disaster, can exacerbate the situation, damaging the organization’s reputation and financial health.
9. Market Failure: This involves a business losing its market share or becoming irrelevant due to changes in consumer preferences, technological advancements, or the emergence of superior competitors.
10. Complete Organizational Collapse: The most severe level of failure, this occurs when a combination of the above failures leads to bankruptcy, liquidation, or the complete shutdown of business operations.

Each failure requires specific strategies for prevention and recovery, involving proactive management, regular audits, adaptive strategies, effective leadership, and crisis management capabilities.

Identifying and addressing failures at early stages can prevent escalation and mitigate potential damages. Adapting to these challenges requires businesses to be agile, resilient, and forward-thinking, with a focus on innovation and strategic planning.