Many small businesses do not survive to celebrate its fifth birthday according to many researchers. It has been found out that 80% of the small enterprises fail within its first five years of operation while 50% of the businesses actually fail within the first year of operation (Karami,2003). In this paper I will examine an example of the failed business, reasons for the failure of business and what could have been done to avoid the failure.
Khalifa airline was founded in the year 1999 by a super entrepreneur Abdelmoumene Rafik Khalifa and started operation two months later (Storey, 2002). It initially starts to operate in African continent but later they expanded their services to other parts of the world such as Middle East, Europe and America.
The airline problem worsened in may 2003 after the bank of Algeria appointed a receiver to manage the affairs of Khalifa bank which was also owned by the entrepreneur Rafik Khalifa; this denied the airline the much needed fund to meet the insurance cost and therefore the same month the other remaining five aircrafts was grounded after the expiry of the insurance contract. The airline was late liquidated by a French court on July 2003 after they failed to pay the creditors (Karami, 2003).
The airline major competitors was; Kenya airways which operates mainly in African continent and provides a very affordable services to the Africans, this was a big challenge to the Khalifa Airline because the Kenya airways enjoys economies of scale as compared to the Khalifa and they were able to charge a fair price for its services as compared to Khalifa thus been detrimental to the operation of the Khalifa Airline.
Other international airlines such as Qatar airways and Global airways were also competitors of the company as they operate in the same market mainly in Europe, Middle East and United State of America. These international companies were able to provide a quality services to the customers because of the adequate resource they are entitled to. This provided competitive advantage for these companies against the Khalifa Airways.
BUSINESS VISION AND MISSION
Company’s mission was to maximize the shareholders value by consistently providing the highest level of customers’ satisfaction, upholding the highest level of security and safety, maximizing employee satisfaction while being committed to the corporate and social responsibilities (Storey, 2002).
The company’s vision was to be the airline of choice in the world by consistently providing safe and secure services to its customers and guaranteeing world class services (Storey, 2002).
CAUSES OF THE BUSINESS FAILURE
The cause of the failure of Khalifa Airline can be attributed to many factors; some of these reasons are;
1. INADEQUATE RESOURCE
The main reason for the failure of Khalifa Airline was lack of adequate resource to run its operation. The company’s demise was as a result of failure by the company to meet its financial obligations such as lease payment and renewal of insurance contract. The company was finally liquidated in the year 2003 by a French court after it failed to pay five million euro to its creditors (Karami, 2003).
The failure of many small businesses can be attributed to overexpansion which is mainly due to overambitious entrepreneurs who confuses expansion with success (Delaney, 1984). Klalifa Airline is not an exemption to this, the management of the khalifa started their operation in Africa but after a year they expanded their services to the Middle East, Europe and united State of America which they were unable to sustain thus led to its collapse.
Another cause for the failure of the Khalifa Airline is poor location. Khalifa airline headquarter was located in Algeria, a country which has high corruption level and high level of political interference on private investment. The appointment of receiver by the Algeria Bank to handle the affairs of Khalifa Bank which largely contributed to the collapse of the airline can be attributed to political interests.
The high corruption level also raised the operational cost of the firm which also contributed to the collapse of the firm.
4. POOR MANAGEMENT
Failure of Khalifa airline can also be attributed to poor management. The management of the Khalifa was incompetent and has little knowledge about the airline industry. This led to poor decision making which later led to the collapse of the firm.
The firm also decided to expand its operation without proper market research and feasibility study which led to the collapse of the firm; this is also due to the poor management of the firm.
5. LACK OF PROPER PLANNING
For any business to succeed it must have a proper business plan. The failure of the Khalifa airline is because of its fundamental shortcomings in their business planning. From the start the firm did not had a proper strategy on how to achieve its mission and vision, the firm went global without proper feasibility study and also with insufficient resource. The firm also did not undertake adequate analysis of its competitors before expanding its operation in Middle East and Europe, this led to the firm incurring a huge loss due to the competitive advantage their competitors had over them.
6. LACK OF CASH CUSHIONS
The firm also collapsed due to the lack of cash cushions, after the khalifa bank was put under receivership by the Algerian bank, the firm did not had any other extra cash to finance its activities. The company was therefore unable to honor its financial obligation such as lease payment which led to its subsequent failure.
The firm should have put in place a proper plan on how to execute its mission and vision. They needed to carry out adequate analysis of its competitors so as to know the competitive advantage their competitors are enjoying over them and how to tackle it.
They should also have done do adequate feasibility study before venturing into any market, to ensure that the market is profitable enough to sustain their operation.
The business should have relocated to other country like United Arab Emirates which offers good incentives for private investors as compared Algeria which has high operation cost due to high levels of corruption and also high corporate tax rate that is levied by the government.
The company should have also looked for other locations where there is no political interference on the running of the private investment.
PROPER FINANCIAL MANAGEMENT
One of the main reasons for the failure of Khalifa airways is lack of proper financial management. The management did not have forecasted financial statement so as to plan its resources well. This led to the company embarking on an expensive expansion plan without adequate resource to support its growth thus leading to its failure.
The company therefore should have prepared adequate financial strategy, before undertaking its growth strategy to ensure that it is able to meet its financial obligation both in the short and long run.
The mistake that the founder of the business did was to employ his relatives and friends to manage the business. These friends and relatives did not had adequate experience and knowledge required to run the company and therefore they took decisions which were not beneficial to company and later led to its collapse.
The company should have ensured that employees who are tasked to undertake strategic decision for the company are well trained and experience so that the decisions that they made will lead to the growth of the company rather than contributing to its collapse.
Another factor that led to the collapse of the company was uncontrolled growth. The company started its operation in Africa and within three years it has gone global, they undertook its growth strategy by leasing twenty five aircrafts without proper financial plan on how to pay the lease payment.
The company should have controlled its growth by ensuring that they only venture into the market where there is high demand for its services and that they have adequate cash flow to finance its growth.
The management should have hired consultant after their profits have start reducing so as to be advised accordingly on the measures they will take to avoid further loss, rather than relying on their own decisions.
Delaney, W. A. (1984). Why small businesses fail--don't make the same mistake once. Englewood Cliffs, N.J: Prentice-Hall.
Storey, D. J. (2002). Understanding the small business sector. London [u.a.: Thomson learning.
Analoui, F., & Karami, A. (2003). Strategic management in small and medium enterprises. London [u.a.: Thomson.