Why is the rate of high-tech failure so high, and why do so many high tech companies fail? The short answer is it really comes down to a lack of customer alignment.
An in-depth analysis of the reasons behind high-tech failure
I’ve had the opportunity to evaluate the management practices of hundreds of high tech companies and here are the primary reasons:
1. Lack of Market Focus (a.k.a. Segmentation)
Emerging high-tech companies often do anything possible to generate revenue and in the process try to be all things to all people. Worried about losing business they avoid segmenting the market and refuse to focus on one or two key segments. As a result the company is unable to adequately serve any one market segment and management is suddenly swamped with support problems and competitors.
2. Excessive Pace of Product Improvement
High-tech products are generally used over an extended period of time, are integrated with complimentary products, and impose learning costs on the end user. As such, customers require time to digest and recover their investment in new technologies and the overall systems in which the products are used. The rapid introduction of new and improved versions can make a customer regret a previous purchase, delay all new purchases, and agonize over similar purchases in the future, none of which are in the long-term interest of the producer.
3. Incomplete Products
Customers view products very differently than the people who create or supply them. In technology-based companies the tendency is to try to sell products on the basis of price, special features and technical specifications. These technical factors are often favored by the engineers and scientists who typically run high-tech companies. The problem is that most customers consider factors such as product support and company reputation to be more important. So the feature rich products created by techies are seen as incomplete in the mind of the customer. Rather than competing on features alone a company should focus on the “intangible” factors that are especially attractive to most customers.
4. Too Much Capital
Raising too much capital before a company has proven its ability to make a profit is often a mistake. Obviously investors play a very important role in helping to grow a company once making profit has been proven as feasible. Too much capital is not inherently wrong – it just usually causes the founder to focus on investors rather than on customers.
Investors are getting smarter; it used to be they would finance ideas and now they finance the ability to be profitable.
5. Channel Mismanagement
There’s more to channel management than just matching distribution to your target customer or segment. Specific skills are required to effectively manage each type of distribution channel and those skills must be developed internally before significant selling can begin. For example, success with a dealer channel requires a top-flight sales vice president or leader who can guide account or market development, and can introduce dealers to key buyers. And once leadership skills have been developed, it is then necessary to overcome the inherent weaknesses of the dealer channel:
- Manufacturer has no control over priorities
- Loyalty is a function of the dealer’s interest in a given product which is determined by demand and the economics of the marketplace
- Sales coverage is limited to the dealer’s circle of contacts
- No motivation to penetrate key territories or accounts
Unique management challenges exist for each primary type of distribution channel: direct selling, dealers, manufacturers “reps” or agents, OEMs, alliance partners, online sales and inside sales.
Read our analysis of why Seattle’s “Most Promising Startup” failed