29 Jun 2019




1.0       INTRODUCTION                                                                                         2

2.0       WHAT IS BUSINESS FAILURE                                                                 3

            3.1       How it start to fall down                                                                     6
            3.2       The Damages                                                                                      9
4.0       RENONG BERHAD, A CASE STUDY                                                       10

5.0       AVOIDING BUSINESS FAILURE                                                              10
            5.1       External Advice                                                                                  12
            5.2       Planning, Budgeting and Forecasting                                                 13
            5.3       Audit                                                                                                   13
            5.4       Cash Flow Statements                                                                        14

6.0       CONCLUSIONS                                                                                           15

            REFERENCES                                                                                              17       

The significant role of business in the Malaysia economy suggests that an understanding of why businesses fail (or are successful) is crucial to the stability and health of the economy. For this discussion we will define Business to be an enterprise that is independently owned and operated for profit that is not dominant in its industry.

It is widely agreed that the growth of small businesses contributes greatly to the nation's economic expansion. Entrepreneurship is linked to creation of jobs, increases in productivity, and improvements of living standards, and to economic growth in the Malaysia in general. Businesses help create new jobs, introduce new products and provide specialized expertise to large corporations. Small firms represent about 99 percent of employers, employ about half of the private sector workforce and are responsible for about two-thirds to three-quarters of the net new jobs.

Unfortunately, according to the Prime Minister Office, over 50% of businesses fail in the first year and 95% fail within the first five years. "Businesses with fewer than 20 employees have only a 37% chance of surviving four years (of business) and only a 9% chance of surviving 10 years", reports Companies Commission of Malaysia and of these failed businesses, only 10% of them close involuntarily due to bankruptcy and the remaining 90% close because the business was not successful, did not provide the level of income desired, or was too weak to continue.

The purpose of this paper is to better understand why businesses fail and how those causes can be avoided. To give a better explanation of the purpose of the assignment, two well-known companies that failed during their venture are used as the case study. At the end, a framework is presented to evaluate the existing resources and understand their influence on the factors of failure from a firm level. The intent is that this is one way that will promote adoption of necessary preventive measures and a plan of action to avoid such failures.


Some conclude that a business failure occurs only when a firm files for some form of bankruptcy protection while others contend that there are numerous forms of "organizational death," including merger or acquisition. Still others argue that failure occurs if the firm fails to meet its responsibilities to the stakeholders of the organization, including employees, suppliers, customers and owners.

From a theoretical standpoint, entrepreneurial process is defined as the set of activities through which innovations change existing combinations of factors of production. The most widely recognized sources of inspiration for an entrepreneur are market efficiencies and technological process. From this viewpoint, a business failure is the termination of an entrepreneurial initiative that has fallen short of its goals.

Every business has a life span that is depicted by its business life cycle. A business life cycle is normally defined by four stages; Introduction, Growth, Maturity and Decline. Most business life cycles will experience a slow introduction and growth stage, a short maturity stage and a rather quick decline stage. Some studies discuss business failures as being the last stage of an organization's life cycle.

Losses that entail one's own capital or someone else's, or any forn1 of capital reduces the rate of business continuance. A business that is not earning an adequate return (or is not meeting owner's objectives) may discontinue existence. Personal reasons such as retirement, illness, death of the owner or selling the business to make a profit accounted for 30% of discontinuance of businesses.

            2.1       When does a business fail?
Berryman (1982) observes that a number of businesses continue to trade while earning low rate of return. When viewed from this rate-of-return perspective, a business is said to have "failed" if it meets any of the following criteria:

·         Earnings Criterion
A firm has failed if its return on capital is significantly and consistently lower than that obtainable on similar investments.

·         Solvency Criterion
A firm has failed if the owner, to avoid bankruptcy or loss to creditors after such actions such as execution, foreclosure or attachment, voluntarily withdraws leaving unpaid obligations.

·         Bankruptcy Criterion
A firm has failed if deemed to be legally bankrupt. Bankruptcy is normally accompanied by insolvency liquidation.

·         Loss cutting criterion
A firm has failed if the owner disposes of the firm or its assets with losses, in order to avoid further losses.

            2.2       Why does a business fail?
Determining why most businesses fail can be a helpful identification of the eventual decline phase of a business. Small firm performance has been studied from a variety of approaches to better understand why some firms fail and why others succeed. Some researchers classify business failures as catastrophic or general lack of success. About two-thirds of those businesses that cite economic factors as a reason for failure, indicate that a lack of profits is the primary reason. Catastrophic failures also result from fire, fraud, burglary and acts of God. While no person starts a new venture preparing for failure, they can have a clear plan for success which involves actions if things do go wrong.

According to statistics from Companies Commission, 88.7% of all business failures are due to management mistakes. Some of the leading management mistakes that lead to business failures are: going into business for the wrong reasons; the entrepreneur gets worn-out and/or underestimated time requirements; family pressure on time and funds; pride; lack of market awareness; the entrepreneur falls in love with the product business; lack of financial responsibility and awareness; lack of a clear focus etc.


Perwaja was first established in the early 1980s in a joint venture between the Malaysian government and Nippon Steel Corp of Japan, with a capital of some RM1.2bil. A few years later, it had to be restructured and the asset was taken over by the Government, after which more capital was injected into the company.

In the mid-1990s, Abu Sahid acquired Perwaja from the Government. However it took many years for the deal to be inked and only in 2003 did Maju Holdings actually assume control. Abu Sahid had subsequently sought the assistance of the Pheng family who controlled Kinsteel, to lend their expertise to run Perwaja.

The Pheng family took over the running of Perwaja and now Kinsteel is also in trouble financially. Perwaja is one entity where the crown weighs heavy on its owners. Under such circumstances, getting a buyer will not be easy unless the valuations are undemanding.

On 20 August 2008, Perwaja reached a new milestone in its history by making its debut on the main board of Bursa Malaysia Securities Berhad. At an initial public offering (IPO) price of RM2.90, the shares were oversubscribed by 189%. Since then, however, the company’s stock had traded at below its IPO price, reaching a low of RM0.60 in March 2009. In mid-2009, the company reported net losses exceeding RM100 million for the first half of 2009 compared to profits of more than RM200 million for the same period in 2008. This was attributed partly to the decrease in steel demand and prices worldwide amidst the global recession. Henry Pheng, Perwaja’s CEO, told Reuters in an interview in March 2009 that the goal for the year was to ride out the recession by planning purchases carefully and taking other cost-saving measures rather than to make profits. Industry observers, however, wondered how much more market uncertainties the company could withstand and what strategic moves it would make to strengthen its market position and succeed in the competitive and volatile steel industry.

            3.1       How it start to fall down
It all started on April 22, 1982. With a paid-up capital of RM250 million, Perwaja Terengganu Sdn Bhd was born. The construction of the plant began six months later.

By the end of 1986, Perwaja Terengganu was already in the red, with a total loss of RM131 million due to management problems and also the appreciation of the yen.

One doesn’t have to be a rocket scientist to figure out why Perwaja ran into trouble.

The plant at Kemaman is just a big steel factory planted smack in a plot surrounded by jungle and far from the sea. Economically speaking, it is an impossible location due to a DNA deficiency of export competitiveness from Day 1.

Secondly, why would any sane person want to open a steel factory in the east cost of the peninsula when steel is consumed in huge volumes on the west coast? Anyone with common sense would locate the steel plant in the west coast to save transport costs. However, Mahathir justified the decision by claiming he was taking industrialization to the east coast.

To make matters worse, Perwaja had a management team that lacked experience. In fact, this was a major blunder.
Perwaja’s Japanese partner, Nippon Steel, as well as the Korean company POSCO and the Korean government engaged BHP, an Australian mining firm, to review the engineering plans. Apart from that wise and calculated move, a Korean consultant was also engaged to check on the Australian firm.

Whom did Perwaja hire to check on its plans? No one.

Perwaja did not take any precautions in its strategies and believed wholesale in a proposal from Nippon Steel to produce Direct Reduced Iron (DRI) to use a new gas-based technology to convert ore into sponge iron for making steel, bypassing traditional and proven iron ore sintering and blast furnace procedures.

Such a move proved costly and detrimental to Perwaja.

In other words, one can surmise Malaysia foolishly paid for this new and untested technology because Perwaja foolishly trusted the Japanese who enjoyed the benefits of the new technology on the Perwaja bill. Hence, it was not a case of Perwaja learning from the Japanese, but the Japanese using Perwaja to learn the new technology.

When the technology failed, the one-third paid back by the Japanese in 1987 as compensation was not enough to take Perwaja out of deep waters.

Caught in a bind, Perwaja had to use scrap metal for a few years. Obviously, with the plant in the east coast, costs escalated, as the company had to bring in scrap metal from the west coast.

It was too little too late again when Mahathir realized the management failure of Perwaja. In February 1987, instead of turning to experts in the downstream steel industry, due to his pride, he set up a new management team headed by Eric Chia, who was then UMW chief, to steer Perwaja out of troubled waters.
In 1988, Mahathir ushered Eric Chia into Perwaja and strapped him firmly in the driver’s seat. Mahathir lubricated Perwaja’s pistons with Government funds (RM 1.01 billion) and loans from EPF (RM 130 million) and BBMB (RM 860 million). He then gave Chia a free hand at doing whatever he deemed necessary in turning Perwaja around. For some years, Chia appeared triumphant in ameliorating circumstances, granting Mahathir seven years of calm before a storm that was to further undermine his regime.

When Chia resigned abruptly in 1995, the nation was jolted with reports of corruption as auditors revealed accounts with colossal arrears. Mahathir’s handpicked chieftain had apparently plunged Perwaja further into debt, with losses estimated at RM1.49 billion in excess of the amount owed when Chia first took over.

Ironically, both the police and the ACA dragged their feet over Perwaja during Mahathir’s remaining tenure. Mahathir defended their hesitance by implicating the Swiss authorities, who he accused of withholding information pertinent to fraud investigations involving Chia. Mahathir was referring to the details of an account to which RM76 million was allegedly channelled to after being siphoned off from Perwaja’s coffers.

But the alleged wheeling and dealing that took place in Perwaja went beyond RM76 million. A year before handing over the baton to Abdullah Badawi, Mahathir came clean on the incidence of mismanagement and fraud during a dialogue with some Malaysians in London, estimating losses at a staggering RM10 billion. But his reluctance in implicating Chia convinced many of his complicity in a massive conspiracy to whitewash Chia’s alleged crime. Compounding to the air of skepticism that wafted around Mahathir was an internal report by the corporation’s new management which listed out several irregularities.

Among them were;
·         inaccurate accounting records
·         unauthorized contracts (hundreds of millions of ringgit worth)
·         dubious maintenance contracts amounting to RM292 milliion
·         RM 957 million in contracts to long time associates of Chia

Mahathir’s claims appeared to be nothing but sophistry aimed at pacifying dissenters. Datuk Ahmad Zaki of the ACA claimed it impossible to ascertain when investigations on Perwaja would wrap up. According to Zaki, the ACA was prepared to continue investigations “even if it took 10 or 20 years.” Now, this is coming from a body that otherwise burned rubber in getting to alleged fraudsters.

            3.2       The Damages
An internal audit report released in early 1996 detailed an array of alleged irregularities during the tenure of Chia, who resigned shortly before the audit report was completed.

The Anti-Corruption Agency (ACA) began a probe in October 1996, after it was revealed that Perwaja suffered losses of 2.98 billion ringgit (US$784.2 million) as at Dec 31, 1995.

The investigation has centered on a 76.4 million ringgit payment that Perwaja made to NKK Corporation through a non-existent company, Frilsham Enterprises Inc, in Hong Kong. Company officials had also used a 490 million ringgit loan, intended for the purchase of equipment for its mills in Terengganu, for other purposes. Other irregularities included a false purchase order worth 58 million ringgit and a payment of US$234 million (889.2 million ringgit) from a Japanese company.

However, almost four years later, the ACA has yet to complete its investigation. No one has been arrested or charged. The agency's failure to wrap up its investigation sooner and nab the culprits responsible for the staggering losses at Perwaja has been criticized by members of both the opposition and ruling National Front coalition.

The long-standing investigation may finally be coming to an end. Early last month, an ACA official confirmed that the investigation is expected to be completed in "a few months."

Like Mahathir, the ACA, which comes under the Prime Minister's Department, has also been frustrated by the Perwaja debacle.


Renong Berhad was established in 1982 in Malaysia and is known as one of the biggest Malaysian conglomerates that has close ties with the government. Renong also held their company reputation as a “political blue chip” company on Kuala Lumpur Stock Exchange (KLSE). The main reason on why the company grew rapidly and diversely was due to the influence of Tun Daim Zainuddin who was the economic advisor of former Prime Minister of Malaysia Tun Dr Mahathir. The main ideology behind this was seen as a transformation plan in which Malaysia would become an industrial power house, and at the same time creating a new class of bumiputra entrepreneurs. Hence due to this, Renong Group was able to secure many government contracts, licenses, and privatization deals, which in return lead to a diversified portfolio of investments which included Expressway & tolls; Engineering, Construction & Infrastructure; Oil & Gas; Property Development; Transportation; Telecommunication, Power, IT; Healthcare; Financial & Advisory Services and many more.

However, when the Asian Financial Crisis hit the country in 1997, Renong suffered from a sharp fall of its share price. Halim Saad, the executive chairman of Renong, refused to restructure Renong to repay the creditors. UEM was at that time a subsidiary of Renong in which they had 37% shares of the company.  Before the Asian Financial Crisis, Renong’s market capital was RM8billion which signified 3% of Kuala Lumpur Stock Exchange (KLSE) total market capitalization. During the crisis period this capital had dropped to RM1.7billion, or 80% within a period of 3 months. Therefore in a bid to salvage the company, Halim Saad engineered a move in which United Engineer’s Malaysia (UEM) bought over 32.6% of Renong Berhad shares for RM2.34 billion or RM3.24 per share. This acquisition was not informed to UEM’s minority shareholders and in return led to investors selling Renong shares which resulted to share price dropping from RM3.24 to RM1.49. UEM lost about RM1.81billion on its investment of Renong stock. Moreover, UEM was also fined for breaching the Companies Act 1965 under section 69(e) and damaged Renong and UEM credibility as a blue chip company. Malaysia’s economy took a further hit due to this as it was seen as a meltdown of a blue chip company which caused investors to pull out of Malaysia and caused a riptide effect in which many other companies took a hit on the KLSE.

In order to appease the unhappy minority shareholders of UEM and to restore confidence into Renong Group, Halim Saad promised to buy the shares back with his own personal money in three years.  He had to pay RM3.2billion option price in four installments, which is the first three of which RM100million each and the remaining will be paid with interest on February 14, 2001. He managed to pay the first RM100million but failed to pay up the second when it was due which resulted in Khazanah taking over.

In my opinion, one of the main reasons why the company failed was because Renong Berhad had invested in too many different types of sector. When the Asian Financial Crisis hit, the Malaysian Ringgit was very weak against the US Dollar and foreign investors were pulling their money out in fear of losing more. This meant that all of the sectors in Malaysia were affected badly, and because of the weakening dollar and investors pulling out Renong as a group with all its diversified assets was hit badly by the crises. Another reason for Renong’s failure is because Halim Saad was known for relying on other people’s money hence making Renong the country’s biggest debtor.


Entrepreneurs should be ready to take up all the necessary actions in order to prevent a business failure. Businesses rarely fail suddenly: Failure is a gradual process which usually involves a downward spiral. However, sometimes failure results from ambitious expansion plans not accompanied by the appropriate level of finance. It should be stressed that entrepreneurs should have a proactive approach, taking the necessary actions as soon as financial problems become apparent.

External causes of business failure cannot always be predicted with accuracy in advance, while the overwhelming majority of factors leading to failure are preceded by premonitory signs of insolvency. Therefore, entrepreneurs should be trained in order to be able to detect and identify warning signs in good time.

            5.1       External Advice
Advice from professionally qualified financial accountants should be sought regularly, beginning at the startup phase, and continuing through all the stages of business life. Entrepreneurs need to be aware of the benefits of acquiring basic financial management skills to take advantage of any opportunities of growth and to anticipate any threats to the survival of the business, reacting to them promptly. Management education should be provided even before starting out in business.

There is a key role of professionally qualified accountants in areas such accounting, financial planning and credit management. Bookkeeping and Financial Reporting practices should be according to recognized accounting principles and sound business practice, in order to produce high quality financial information, which sets the ground for the efficient and effective growth and the survival of the business.

            5.2       Planning, Budgeting and Forecasting
A well-run business will have controls in place to monitor the business plans and an information system which regularly updates the management on progress towards its objectives. Controls should also give an early warning that the trading performance is deteriorating and provide pointers to steps which should be taken to correct the situation.

Many large companies undertake some very advanced financial modeling based on a number of possible future possibilities. However, planning, budgeting and forecasting are vital tools for SMEs as well, although they will not usually need to be as sophisticated as the corresponding procedures in larger companies.

5.3       Audit
Where the financial statements of the company are audited, the entrepreneur will have a higher level of assurance that the company’s financial information provides a sound basis for economic decisions. Independent audit is also a deterrent against fraud and increases the likelihood that any frauds committed will be detected.

For this reason, it is advisable also for those companies for which audit is not compulsory by national law to commission a voluntary audit of their financial statements. This will enhance the credibility of the company’s financial reporting and results, especially from the perspective of banks.

If the audit report includes a qualified, disclaimer of or adverse opinion, or an ‘emphasis of matter’ paragraph in which the auditors stress a going concern problem or a significant uncertainty of which the resolution is dependent upon future events and which may affect the financial statements (tax or other litigations etc.), it is important for entrepreneurs to solve the identified problems as they represent causes of potential insolvency of the business. To this extent, the audit process can offer helpful early warnings of possible problems the business is facing.

5.4       Cash Flow Statements
Information about the cash flows of an enterprise is useful in providing users of financial statements with a basis to assess the ‘ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilize those cash flows’. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and the timing and certainty of their generation.

When used in conjunction with the rest of the financial statements, a cash flow statement provides information that enables users to evaluate the changes in net assets of an enterprise, its financial structure (including its liquidity and solvency) and its liability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. A cash flow statement is a key to understanding the investment and financing philosophy of a borrower; it will be used by banks to assess whether the business has enough cash to generate cash to repay a loan.

Cash flow information also enables users to develop models to compare the present value of the future cash flows of different enterprises; It enhances the comparability of the reporting of operating performance by different enterprises because it eliminates the effects of using different accounting treatments for the same transactions and events.

The cash flow statement should report cash flows during the period classified by operations, investing and financing activities.


To address the issues that lead to business success or failure a firm has to be viewed in a broad perspective. Some of the causes are directly related to the owner/manager skills while others are more related to the environmental variables such as financials, competition, customer behavior etc.

In considering the owners/managers skills it is regrettable that in some cases the very strengths that an entrepreneur possesses may be the same ones that may lead to the failure of their enterprise. It often behooves the entrepreneur to seek out and use the council of outside advisors and experts to avoid the pitfalls that appear due to the owner/managers individual areas of management inexperience.

Preventive measures are mostly limited to what can be done on a firm level. Policy makers and firms can collectively influence the environment, but have limited ability to influence it individually. Once the causes are broadly identified, the ones that require high attention are addressed at the firm level. For a small business it is healthier (i.e. has a greater potential to succeed) to adapt to the environment in which it operates than to try to make the environment adapt to the firm's needs.

In today's competitive markets, the buzz-phrase is 'customer is king'. For a business, the reason for existing is its customers. Furthermore, the customer depends on a firm because of its resources. A careful examination of the resources that a firm possesses can enable it to evaluate opportunities and threats and act accordingly. Although this resource approach is only an example of the various methodologies that can be used to minimize the risk of failure, it does demonstrate that a firm must assess itself and act on that assessment. Under this approach, the assessment focuses on resources. Resources can be anything that helps produce, either in terms of intellectual/technological capital or properties/equipment. Some resources have long-term effect while others are useful short-term and in daily operations. Some others focus on building internal efficiencies while others strengthen a firm's relationship with its external stakeholders. All these resources, considered in a balanced approach, help reduce the risks of a firm's failure and sustain healthy growth.


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