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This dissertation explores the analysis of factors that are leading to the failure of small Hospitality Industry businesses in the United Kingdom. This chapter will draw outlines for the study, and define the subject, as well as draw background to the study and detail its problem statement, with a clear explanation of the purpose, aims and objections. Analytically identified issues affecting longevity of small Hospitality sector firms will provide valuable insights for entrepreneurs starting new business within the industry.
A considerable amount of literature has been published on small and medium enterprise management; however there is increasing concern about failure rates of small firms within the Hospitality Industry. Foundation of international economy are small businesses, however, ones have high failure rates, on average more than half of small and medium enterprises that were started ultimately fail (Lazear, 2002). According to Epos Now (2015), 60% of new hospitality industry businesses do not make it past the first year and 80% go under in five years, which is 10% above the normal business failure rate.
Small businesses increasingly face competition, for this reason, it is important to identify the reasons influencing performance affecting the longevity of small Hospitality Industry businesses in the United Kingdom. This research paper therefore endeavour this situation by conducting research in to problems that hinder small business development based on academic research, theories and primary research.
- To investigate which factors influencing success and identify issues that may result in the failure of small businesses operations in Hospitality Industry sector the most.
- Explore factors responsible for small businesses success; understand factors and dynamics that will reduce failure rates.
- To Undertake research and to find out the most common issues influencing the failure of a small firm and investigate good practices of firms that are running a business successfully, therefore Identify the difference between both.
- To collect qualitative and quantitative data drawing a connection between decisions and practises than successful firms undertake to justify the outcome.
- Identify Macro Economical factors and Microenvironment factors that afflict sustainable businesses.
The Hospitality Industry has the highest rates of businesses that have failed among other industries, despite this fact it is the most popular sector for start-ups and new businesses (Lewis and Renn, 2010). Therefore this research will critically analyse potential pitfalls and reasons for failure, contrast and compare to other industries and evaluate strategies for sustainable business within the industry (Ananthan et al., 2010; Griffin et al., 2014).
Prior starting research into the subject, it is important to identify brackets and limitations under which research will be undertaken, therefore this research will be based on of small businesses in Hospitality industry sector located in United Kingdom (Stone et al., 2004).
The European Commission (2005) characterizes Small and Medium Enterprises (hereinafter SME) as the engine of the European economy (The new SME definition, 2005). SME’s greatly contributes to the UK economy, according to fsb.org.uk (2019) SME account for at least 99.5% of the businesses in every main industry sector, and generate 51% of all UK business turnover (fsb.org.uk, 2019; Shaw, 2011). This section briefly explain key terms that are used in the study.
Throughout this dissertation, the term entrepreneur will be used to refer to a person who starts their own business, while entrepreneurship refers to concept of developing and managing a business with a goal to gain profit (Entrepreneur Handbook UK, 2019).
Small Business Definition – SME’s consist out of three legal forms, which are sole proprietorships, companies and ordinary partnerships, all of which are privately owned (Cowling et al., 2012). SME contains three categories of businesses, which are Micro, Small and Medium. There are several ways to determine SMEs, nevertheless, each industry has its own characteristics defining small businesses, and most common ones are quantitative and non-quantitative definition of the SMEs (Rhodes, 2018).
Quantitative Definitions – SME’s can be defined according to employment number which differs in different areas and countries, in the UK it is considered from 0-250 employees, where 0-9 is micro, 10-50 small, 50-250 is medium (Rhodes, 2018).
Another factor identifying small firms is financially based, in accordance with UK’s Companies Act 2006, small business has a turnover of no more than £6.5 million, and however, these definitions are not binding (Dean, 2008; Harrison and Baldock, 2015).
Non-quantitative Definitions – It is difficult to define SME’s as it does not have strict guidelines, and quantitative assets of the business may vary due to the origin of an enterprise and an industry (National Archives Gov.uk, 2015). UK government (1971) defined three essential characteristics of small businesses, which are following (UK Government Lords Sitting, 1973; Stokes and Wilson, 2010).
- Managed by its owner or owners in personalised way
- Has relatively small share of the market in economic terms
- Is independent, and does not form a part of a large enterprise, ownership is relatively free from outside control in its principal decisions
Business Failure Definition – Business failure refers to a company that closes as a result of actions such as bankruptcy, foreclosure or voluntary withdrawal from the business with financial loss to a creditor, or due to court action such as receivership or reorganisation (Hatten, 2009).
SME Performance Review (2013) created by European Commission stated that UK is having a very competitive environment for SME’s compared to other European Union (EU) the Member States, which allows maintaining a high level of employment with the positive increase (Ward and Rhodes, 2014). UK’s macroeconomic result in strengthening human capital and employment rates, which reached its highs, with the unemployment rate estimated at 4,1% only, which supports the more sustainable growth of the economy (Nordeatrade.com, 2019).
The British economy is the world’s sixth-largest, however, it slowed down after the Brexit referendum in 2016, which affected the most SME’s (PwC, 2019).
Since the start of 21st century, and globalisation, in United Kingdom (UK) number of registered businesses increased by 63%, starting from 3,5 million private sector businesses to 5,7 million (Rhodes, 2018). Since the year 2000 number of businesses was only growing, however, in 2018 was a drop by 27,000 compared to the previous year, which is the first registered fall in 18 years (Department for Business, Energy & Industrial Strategy, 2018; Rhodes, 2018). Small and Medium business death is growing gradually, wherein 2006 was 9%, and by the year 2017 is 12%, and the business death rate is expected to increase even more in future (Rhodes, 2018).
74% of Businesses in the UK account to the service industry, where Hospitality Industry Hotels and Restaurants are second on median profit margins, which make it second most profitable sector of SME in the UK after Wholesale and Retail sector (GOV.UK, 2019; Merchant Savvy, 2019).
Study of 150,000 UK registered enterprises reported, that 15.5% of Hospitality Industry businesses fail, compared to 5.25% for the economy on average (Small Business, 2007). Recent research conducted in 2018, showed that the hospitality industry remains a leader by company failure percentage among twelve Industries (Credit Strategy, 2019; Credit Safe, 2019), (Appendix A).
Factors for business failure are complex, notwithstanding the most prevailing are caused by the inadequate management system and financial aspects (Hatten, 2009).
Failures for business can be categorised, and the concept of them contributing to failure can be either internal or external (Carter and Jones-Evans, 2012), (Appendix B)
However there are many factors that are beyond the control of organisation, major reasons for unsuccessful ending of the business are internal, therefore this study will be focused on issues that business can prevail (Carter and Jones-Evans, 2012). Numerous factors affecting business sustainability, therefore examining them prior business launch will place entrepreneurs in to better position and notably increase chances for success (Beaver, 2003).
Hatten, (2009) states, that identifying mistakes that can be made is only one segment of the problem, figuring out how business can avoid them is actual endeavour.
Conducting detailed research upon factors influencing small business failure in the Hospitality Industry according to Carter and Jones-Evans (2012), Hatten (2009), Parsa et al., (2005) and Parsa et al., (2015) are the following; Inadequate Financing, Inadequate Management, Lack of Planning, Lack of Experience, Missing an original concept, Insufficient Marketing and lack of advertising, Failure to understand Market, and Consumer buying behaviour, Poor customer service, Location, Failure to anticipate the change, Heavy operating expenses, Disposable income of public, Overgeneralisation and overdependence on a single customer, Unexpected Growth, Personal Use of Business funds and Lack of financial support.
In this section will be evaluated and critically analysed some of the main factors, however, other numerous aspects were revealed, that led firms’ value fall below the opportunity cost of staying in business (Cressy, 2006). Nevertheless, every third failed business in a period of four years after firm birth was considered by the owner or by the management team as successful, this factor indicates that SME’s managers are unaware of factors that might ruin business prosperity (Headd, 2003; Beaver, 2003).
Small Business failing due to inadequate financing is generated upon improper managerial control, along with a shortage of capital caused by the poor management of cash flow (Liao et al., 2009).
Without sufficient funds business will struggle to afford facilities and personnel needed for operations (Hatten, 2009). However, adequate financial capital is no singular solution for sufficient business flow, as poor management techniques possess to maintain inventory or balance needed for smooth operations (Carter and Jones-Evans, 2012). Moreover, statistically in the first 6 months after opening a new business does not make any profit, therefore deficit of funding might fail business on an early stage of development (Strotmann, 2007).
Success in business is never automatic; it is strictly based on owners and management foresight and organisation (Hodgetts and Kuratko, 2008). Business Management is an efficient and effective use of resources; therefore management skills and experience in the industry are principals of successful business, as SME’s does not have access to specialized management experts, who can advert expenditure fault (Alger et al., 2004). Hatten, (2009) states, that 89% of failure origin are internal factors that are directly under control of the management such as adequate capital, cash flow, facilities and equipment inventory control, human resource, leadership, organisational structure and accounting systems.
Benjamin Franklin states, that ‘’If you fail to plan, you are planning to fail’’ (Matherne, 2004, p156). According to Steiner, (2014), strategic planning is an essential tool for entrepreneurs to create a successful business, as it identifies its goals and considers the path of least resistance for the targeted outcome. Moreover, the ability to think strategically enables the company to understand, identify, predict, respond and adapt to opportunities and challenges (Pisapia et al., 2005, p46). Henceforth, developing a reasonable business plan is the starting point for any business, nevertheless, many Hospitality Industry entrepreneurs neglecting the importance of the comprehensive business plan, which might explain high failure rates within the sector (Hunter, 2011; Korte, 2013; Van Niekerk, 2016).
Corporate financial analysist warn entrepreneurs, that small business in the hospitality industry should be particularly attentive to their business plan and strategies because this sector is particularly vulnerable to macro-economic factors (Heller, 2011). However, Walker, (2014) argues, that most restaurant managers and business creators write sales-orientated business plans, not taking into consideration external aspects. Henceforth, the business plan should include an overview of the business, operations plan, sales and marketing, financial plan, projections as well as market and competitive analysis (Karlsson and Honig, 2009).
The UK Government offers free support and guidance to help write sufficient business plan, this is done to minimize failure rates of SMEs, however, majority entrepreneurs do not take advantage of this (GOV.UK, 2019; Talk-business.co.uk, 2019). According to statistics provided by Talk-business.co.uk, (2019) only 47% have a formal business plan and every fourth business does not have any, which threatens for revenue growth of the business and eliminates the possibility for success. Moreover, UK government offers free mentoring for small business owners in the first year after launching the business, which can assist entrepreneurs on aspects of not their expertise and provide specialised comments based on experience how to run the business (GOV.UK, 2019). Taking this information into consideration, SMEs owners will only benefit from accepting help provided by the government and will increase the chances of business survival (Princes-trust.org.uk, 2019).
Hospitality and tourism sector suffers from lack of essential skills, for instance, 21% of hospitality business reports about the skills gap, in comparison with 15% of all other businesses in UK (People’s 1st, 2015). Not only staff is lacking the experience, the but the prevailing quantity of entrepreneurs are also attracted to create firms especially in Hospitality Industry due to association with lifestyle or hobby, therefore many underestimated the degree of planning and skills required for a business to stay afloat (People’s 1st, 2013).
Two-thirds of hospitality businesses believe that skills gap, which can be described as the difference between skills that are required for a job and skills that workforce can offer, have an impact of the business performance (Bharwani and Butt, 2012; People’s 1st, 2015).
As pointed out by People’s 1st, (2015) Hospitality industry is labour intensive and does not have a recruitment problem as such; it struggles with finding skilled manpower and retention of talents. Moreover, SMEs are intermittently dependent on a small management team, which usually does not have appropriate management training and often does not have finances to afford human resource trained person, who could deal with staffing issues (Boella and Goss-Turner, 2013; Hendry et al., 1995). Small firm owners or management team physically cannot be a specialist in all spheres of the business; therefore lack of experience might lead to the financial losses or failures, as they are not informed about legal aspects (Scarbourgh, 2012).
A research study conducted by Storey, (2006) found parallel pinpointing a negative relationship between previously unemployed entrepreneurs and business sustainable performance, therefore the prospect of failure for ones who does not have experience in the sphere of the business is higher.
Core value and purpose of every business is the profitability, where business trade its product or services into capital (Griffin et al., 2014). Marketing is a fundamental element of business, as it drives business goods from concept to consumer; besides, it boosts sales and raises brand recognition which is vital in a competitive market of 21st century (Armstrong et al., 2016).
Patten, (2001) states, that every small business must invest in marketing to grow, and parsimony in marketing or advertisement equals saving on profit, as there is a straight correlation between two. Budgeting correctly marketing and advertising might be challenging, especially on a start-up phase of the business, as it depends on the industry, market competition, profit margins and revenue (Boykin and Thompson, 2019).
Small business administration (2019) recommends spending on marketing 7 to 8 percent of total revenue, however for new companies entering the market with high competitive rivalry as hospitality sector is recommended to double the amount of the investment.
Hospitality industry small firms are facing multiple challenges in marketing their product, one of them is lack of resources, both physical and financial (Dickinson and Vladimir, 2004). Moreover, insufficient marketing plan or its absence put the company in the position where products do not receive recognition from the consumer, and business can fail even before starting earning any money (Czinkota et al, 2018). Another problem that hinders small business development is picking wrong distribution method and not targeting audience correctly, in this case, business is losing its investment money, as a distribution channel is not reaching potential consumer (Schmitt, 2011). However this can be avoided through careful business planning in the beginning, careful analysis of market and tracking sources of purchasing (Schmitt, 2011).
Research conducted by Parsa, (2011) specifies, that one of the main factors for a consumer while choosing services in Hospitality Industry was location, as vast majority agreed, that they would pay more for a hotel that is located in a preferred location or close to tourist attractions. Same works for restaurants, as potential customers agreed, that they would not travel longer than 17 minutes for casual dining, therefore restaurant located in a busy area on a street with high passability close to other facilities wins attention (Marchant, 2014). Moreover, statistics support this thought, as the financial turnover of restaurants bars and cafes is higher, what can be justified by higher clientele turnover and a population base that supports the business (Gerard, 2015).
Therefore one of the vital factors influencing the performance of hospitality industry services is location; however some of the entrepreneurs neglect that, due to higher prices for property, and inability to afford to rent or to buy property in high demand location (Karakaya and Canel, 1998; Parsa, 2011). Therefore it might play an important factor in consumer behaviour and buying decision, as despite the high quality of the product and correct management business will suffer from insufficient funds due to the unattractive location (Parsa, 2011).
There have been a number of longitudinal studies involving change management that have reported its importance for the organization, especially in the time of the globalization, which is leading to increased competition and rising pace to change (Harigopal, 2006; Flamholtz and Randle, 2008).
Pollard, (2004) claims, that change is inevitable and without change, there is no innovation, creativity or neither incentive for improvement, therefore, thus who initiate change have a better opportunity to manage it. This view is supported by Henry, (2001) who writes that companies should show their ability to adapt and manage the change to overcome barriers of resistance and demonstrate long term success.
Other studies have considered the relationship between firm anticipating change and progression within the market, for instance, Kotter, (2012) states, that resistance of systematic strategic approach to major changes ends up with 70% failure rates. Furthermore, Kotter, (2012) estimates that majority of changes within the firm are convicted to a fall due to human nature and fear of taking risk and fear of the unknown, however, entrepreneurs who resist towards change will not succeed in the business. Therefore, numerous of change models have been created, to help business overcome barriers and stay afloat with moving changes (Sloane, 2007).
Nevertheless, Hospitality industry small firms are facing challenges anticipating change, due to various reasons, one of the main aspects is high cos of change implementation if the conversation is about technology (Pant, 2011). Large firms in the industry are generally not only accepting technological change, but they are also drivers and setting the targets for others (Kasavana et al., 2011). To give a clear example, Premier Inn introduced self-service technologies which enable customers to be more independent (Premier Inn, 2019). Another illustration of a company that anticipates technological change is Hilton organisation, which introduced the Digital Key App with online check-in and reception feature, which undeniably attracts market for the innovation (Hilton, 2018). Large firms have financial priority comparing to SME sector, however a statistically large proportion of small firms in the UK are adopting the technological trend, obstacles may occur (Khatri, 2019). One of the main is not providing proper training for a staff or management team regarding new implementations, which negatively reflects on business operation and its revenue in the future (Kasavana et al., 2011).
Small business has a significant impact on the social, economic and political aspect of any country, there is the fundamental link between the level of development of small business and sustainable economic growth of the country (Cowling et al., 2012; Ward and Rhodes, 2014). Therefore SME receives financial and credit support from the government in order to create a favourable climate for the SME development (GOV.UK, 2019).
UK government policy aims to interest commercial banks in lending money to the small business sector. In the year 2012 The National Loan Guarantee Scheme (NLGS) was created, the purpose of which is to help businesses access cheaper finance, which is done through minimizing the cost of commercial bank loans (United Kingdom Debt Management Office, 2019). Reasonably low-priced rates for entrepreneurs are available because the government is used as a guarantee on unsecured borrowing by banks (British Business Bank, 2019). Under this program, the government can cover up to 75% of loan defaults, however, small business is eligible for this government support, only if it has a business plan written, covering all the sections (British Business Bank, 2019). Previously in this study was analysed benefit for the business of creating a business plan, therefore it is important to add, and that Start-up Company might be suitable for alternative financial support if the business plan is created (British Business Bank, 2019). For instance, a new entrepreneur with the business plan has the possibility to apply for extraneous investment where business owner does not invest from personal finances and does not take the loan (British Business Bank, 2019).
Despite the fact, that UK Government offers financial support for SMEs, some of them struggle to access finances, therefore it creates lack of finance for the firm, which does not allow to core business activities to subsist or expand (BEAM Exchange, 2019; Lee and Drever, 2014). Lack of finances for firms might be explained that banks and financial institutions decide not to invest in ventures because information about the business is imperfect and incomplete (House of Commons Treasury Committee, 2018).
Business failure prediction models were conducted after increased bankruptcy rates in the 20th century; this applies numerous statistical tools to identify pitfalls on earlier stages (Altman, Hotchkiss and Wang, 2019). There are two main approaches to for forecasting failure of the firm; quantitative and qualitative, where the first one is based on non-bankrupt firm financial data and the second approach compares firm data (the one that being investigated) with data from bankrupted firms. Enterprise Bankruptcy Forecasting Models (Multiple Discriminant Analysis or MDA Models) are methods that use an integrated scoring system, which carries the features of both a quantitative and a qualitative approach. Although, there are numerous amounts of prediction models; the algorithm for constructing all MDA models are the same (Peña, 2014).
Firstly, a sample of bankrupt enterprises is being formed, and then a sample of non-bankrupt enterprises, followed by calculated financial ratios of both groups, then using MDA toolkit regression equation is constructed to classify all enterprises into two, and finally, adequacy of the constructed model is checked (Peña, 2014; Danilov, 2014).
The first model was created by Edward Altman in 1968, and is called Z-score; this model was based on enterprises in the USA, lately, in 1972 Lisa Gilbert adapted the model to UK market, taking the z-score model as a basis (Altman, Hotchkiss and Wang, 2019). Later in 1977, Richard Taffler creates a z-score linear discriminate analysis based on UK enterprises which gives the ability to predict the conditions of future operatively and confers evident and undisputed benefits (Balcaen and Huber, 2006). Moreover, the failure prediction model provides both internal and external analysis, which is relevant for a firm that undertakes analysis, as it points out if the decision-making process needs to be changed and in which direction (Danilov, 2014). Companies who undertake this analysis might predict its failure up to 5 years, and therefore implement changes into the organisation in order to save it (Senbet. and Wang, 2012).
This research aims to investigate factors that are leading small Hospitality Industry businesses in the United Kingdom to the failure. Purpose of this section is to examine different systematic and theoretical analysis approaches that are applied for the study in order to cover three objectives and therefore provide clear justification of methods that will be used.
Research design is a framework outlining techniques and strategies, this study is adopted descriptive survey design, which describes. In order to understand how the specific problem previously mentioned is addressed by the researcher, it is crucial to understand the parameters and dimension by which the research is completed. The Research Onion Model in figure 1 evaluated by Saunders, et al. (2012) is here employed which, as mentioned by Cronholm & Hjalmarsson (2011), allows the researcher to firstly undertake a holistic approach to the problem and ultimately reach specific conclusions. As expressed by Eriksson & Kovalainen (2008) this model assists in constructing a theoretical framework for the practical research by setting the phases described in the following chapter. Saunders, Lewis and Thornhill (2012) suggest that research philosophy could be positivism, realism, interpretivism, subjectivism or pragmatism. For this dissertation, a mixed-method and sampling approach have been taken, whereby data is interpreted by taking into consideration the complexity of social science (Saunders, Lewis and Thornhill, 2012).
Figure 1, Research Onion
Jones, (2004) refer to population as a group that is the subject of research interest, thus the population is a study object which specifies an area, either physical such as people or businesses. Observably, the literature review here reviewed the main internal factors that lead a small business to failure. This study population is focused on the United Kingdom Hospitality sector SME’s business owners or managers. The size of the full population is too broad and impractical in this study; therefore it will sample the population which will later generalise findings for a United Kingdom area.
To ensure primary research is valid and relevant as possible the respondents are chosen due to their employment status, which specifies in the questionnaire from which point of view they are looking at the issues. It either going to be owners and managers, or employees working for small companies. The respondents are chosen in the hospitality industry sector, who own, run or work for hotels, restaurants, bars etc. Convenience sampling is used as it requires the least time and resources of any method; however, it should be noted that it rarely results in a representative group which can, therefore, bias the results.
A questionnaire (see Appendix B) was utilised in this research to gather the data. It was designed under nominal and ordinal scales of measurement. According to Kothari (2004:18), a questionnaire is the means of collecting identical data from a large number of people by using a unique technique, where the result is later analysed systematically. This technique allowed the researcher to approach as many respondents as possible, in order to enhance the accuracy and validity of the data. According to Sarantakos (1998:224) and Denscombe (2007:169), it also helps the researcher to reduce discrepancies in the analysis of data, minimises costs of materials and saves time. The questionnaire will be designed to be distributed online and for the respondents to self-complete (Bryman and Bell, 2011). This approach will reduce the impact of interviewer bias as the interviewer will not be present to influence the respondent (Bryman and Bell, 2011; Reid et al, 2010). A self-complete questionnaire will also allow the respondent to complete the questionnaire at a convenient time and, at a speed, they are comfortable with. The questionnaire will consist of dichotomous questions, multiple-choice questions, rating scale questions and open-ended questions.
In this dissertation will be reviewed and applied Altman’s z-score model, which is adapted to the modern market and estimated for private firms. However, there is no specific model created for the hospitality industry sector, according to Altman, Hotchkiss and Wang, (2019) this model can be applied to all industries private firms.
Altman’s Private firm model:
Z′ = 0.717X1 + 0.847X2 + 3.107X3 + 0.420X4 + 0.998X5
X1 = (curent assettes − curent liabilities) / total assettes
X2 = retained earnings / total assets
X3 = earnings before interest and taxes / total assets
X4 = book value of equity / total liabilities
X5 = sales / total assets
Zones of discrimination:
Z′ > 2.9 – “Safe” Zone
1.23 < Z′ < 2.9 – “Grey” Zone
Z′ < 1.23 – “Distress” Zone
In this study will be calculated small and medium firms in the Hospitality industry using endole.co.uk service, that allow viewing company assets, debt ratios and liabilities. This numbers can be adapted to Altmans private form model in order to calculate which firms potentially will fail and therefore investigate if they had a business plan and ask to participate in the questionnaire.
Research must confirm the principle of voluntary consent where respondents willingly participate in the study. According to Sanders & Lewis (2012), ethical consideration became a bigger concern over the past decades in order to prevent harm and distress to respondents. This research informed participants with a disclaimer that participation is anonymous and they can finish the research at any time. This study will not disclose the organisation names and names of the owners, to respect privacy and not to put into a conflict situation, in case if other individuals will read the study.
The following chapter presents and discusses the findings of the study.
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|Industry||Percentage of Small Business failures|
|Hospitality, Hotels, Restaurants and Bars||0.33%|
|Utilities and Management||0.17%|
|Transport and Logistics||0.12%|
|Banking and Financial Activities||0.11%|
|Sports and Entertainment||0.08%|
|Farming, Agriculture and Fishing||0.05%|
Adapted from Credit Strategy (2019) and The Insolvency Service (2019).
|Internal Failure Factors||External Failure Factors|
Adapted from Carter and Jones-Evans, (2012), pp184.
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