BUSINESS STRATEGIES FOR THE COVID-19 RECESSION
The World Economic Outlook projects global growth in 2020 to fall to negative three percent due to the COVID-19 pandemic. The IMF further indicates that the world is facing the worst economic downturn since the great depression.
Article By Zelda Okatch | Senior Consultant Research BNPC
Indeed, the drastic drop in economic activity imposed by lockdowns and other restrictions to contain the disease make the effects of the last global financial crisis look minor. Already, governments all over the world, including that of Botswana have enforced fiscal packages and monetary policies to minimise the effects of the crisis. Such interventions are a step in the right direction and will definitely provide some form of relief for businesses. However, what mainly determines whether a business will ride out the storm and survive, or even thrive for that matter, are the strategies that it adopts at this crucial time. Many practical and realistic steps exist that Botswana businesses can use to minimise the effects of the downturn and position themselves to emerge even stronger when economic conditions improve. This article provides a few insights in this regard.
Unfortunately, business operations cannot continue as usual after the lockdown restrictions are lifted. Folding one`s arms and waiting for things to return to normal is the first mistake any organization can make, especially, since no one can accurately predict how long the crisis will last. During a recession companies immediately experience reduced sales, delayed payments and lower profits. This can translate to cash-flow problems that could lead to bankruptcy. It should be noted that although government has offered to be a guarantor for loans, that does not in itself guarantee that all companies in Botswana will have access to this facility. Hence, businesses need to urgently plan and prepare for the full effects of the pandemic and the looming recession. Research indicates that only nine percent of companies come out of a recession stronger than before,with successful companies being those that re-examined almost every aspect of their business model. It is, therefore, of paramount importance that businesses conduct comprehensive investigations to identify the magnitude and full impact of the recession on their operations. Such an exercise would help provide informed solutions to mitigate or lower the effects.
A natural response to falling revenues usually involves adopting a defense mechanism which may entail frantically cutting costs. Cost-cutting measures and clamping down on expenses definitely does go a long way in keeping businesses afloat during a recession. However, this strategy if implemented recklessly has the potential of choking creativity, innovation and morale. Efficiency can be overlooked and replaced with the aim of doing the job with minimum resources. This compromises quality and could lead to a drop in customer satisfaction, delivery, and customer loyalty, all of which are the nuclei of post-crisis growth. Therefore, cost cutting initiatives should be conducted with caution. Expenditure cut backs on activities like Research and Development(R&D) and Information Communications Technology(ICT) should be carefully weighed. R&D and ICT facilitate innovation that could provide a long term competitive advantage. Marketing should also be viewed as a significant business function. Regardless of financial constraints, it is vital for businesses to maintain a strong brand presence and to actively keep communicating with customers in a time like this. It is recommended that cost saving initiatives should never come at the expense of the ability to execute long-term visions.
Therefore, cost cutting initiatives should be conducted with caution. Expenditure cut backs on activities like Research and Development(R&D) and Information Communications Technology (ICT) should be carefully weighed. R&D and ICT facilitate innovation that could provide a long term competitive advantage. Marketing should also be viewed as a significant business function. Regardless of financial constraints, it is vital for businesses to maintain a strong brand presence and to actively keep communicating with customers in a time like this.
In this regard, cost optimisation would be a better strategic response as opposed to cost minimisation. While the former refers to a direct, but more or less, a one-time action aimed at reducing corporate expenses, the latter is a continuous effort to drive spending and cost reduction while maximising business value. Cost reduction must be informed by an assessment of the present cost base and the value derived from each significant cost category. This would also require an evaluation to establish if all business purchases, including inputs, are obtained at the best price and terms for the quality received. Other aspects to be considered are whether wastes are being eliminated, whether it is cost effective to outsource a business function, or find ways to share the function with other businesses. Another helpful initiative worth considering is converting, where possible, some business fixed cost into variable cost. While fixed costs are incurred regardless of the business levels, variable costs are only incurred when revenue producing business is generated. This means that when sales fall, variable costs are automatically reduced or eliminated, helping to buoy profitability. To achieve this, companies could consider transportation leasing, third party warehousing, and outsourcing to reduce variable costs. It should be noted that, however, labour cost cannot be easily manipulated as government has imposed a six-month retrenchment restriction.
As indicated earlier, one of the immediate impacts of the recession would be constraints on business cash flow. Cash flow management in a crisis is absolutely vital for small establishments. It can mean the difference between survival and extinction. Unfortunately, leading universities in China estimate that 85 percent of small and medium sized enterprises (SMEs) in China will run out of cash within three months, if the crisis does not abate. An equally devastating position can be expected for Botswana`s SMEs, especially in sectors where activities have been suspended for six months. A proactive approach to manage this entails shifting focus from income statements to cash flow statements. In addition to cutting cost, accounts receivable should be closely monitored. Discounts and other incentives should be offered to encourage customers to pay faster. Where possible firms should move away from invoicing and encourage pre-payments. It is also advisable to hold on to cash at hand by putting off payments until they are due and lowering the inventory level. Although it may be tempting for businesses to stock up on inventory given the uncertainty in the market, this should be avoided as it will only tie up much needed cash. Selling non critical company assets could also enhance cash flow.
As business levels drop, it is also prudent to identify your most profitable customer. Every company has loyal customers and this is the time to focus on them more intensely. Carefully designed strategic promotions should be utilised to maintain this key market segment. Questions should be asked on how customers` needs may change during the recession and resolutions should be made to address them. If it is anticipated that customers may behave differently during the recession,strategies should be designed to optimise this. Thought should also be given to how competitors may react. If opportunities present themselves, given the changing market, introducing a new product line should be considered given the available resources. Such considerations have the ability to catapult the business forward.
Unlike other recessions, the COVID-19 crisis is unique as it can affect business operations if employees contract the virus. To avoid disruptions of this nature, it is very important that employees are provided with a safe space to work in. The extent to which employers support and enable their employees during this period can have a profound impact on the productivity of a company. Initiatives like the provision of hand sanitizer, extra cleaning efforts, provision of protective gear and social distancing practices would protect employee`s health and safeguard the business in the long run. To prevent the spread of the disease to others, employees displaying symptoms should be encouraged to self-isolate. Employers should look into business continuity plans, which should include a plan for how to maintain key business functions if faced with high absenteeism. Consideration should also be given to cross-training personnel to function in key positions in case the main employee for a given position falls sick.
Another means of safeguarding employee health is to allow employees to work from home, as widely encouraged. Companies may be skeptical about this approach as the question arises that if employees are not seen working and closely monitored would they actually perform their assigned tasks and duties. However, it is time to place more emphasis on the employees deliverables as opposed to their physical presence. Working remotely is not a new concept, the model has been practiced in developed nations with some level of success. It is based on the premise that for some jobs, work does not need to be done in a specific place to be executed successfully. In fact, studies show that working remotely can improve employee engagement, reduce employee turnover, increase employee productivity and lower the number of sick offs. In the US, working remotely saves businesses an average of $11000 per annum, per employee, in the form of lower rent costs, furniture costs and tea expenses. However, it is strongly recommended that before such an initiative is implemented, companies should develop a policy to guide this. A working remotely policy should clearly outline all terms and conditions that employees should adhere to when working at home. This would help avoid disruptions to company procedures and operations. It should address issues like who can work from home, how they should go about working from home, what is expected of them, how their work and productivity will be measured, how they will be supervised, their legal rights, and what support and equipment will be provided, amongst other things. It should be noted that the success of this model hinges on how supervisors and teams stay connected and communicate. Employers considering this model are urged to ensure that they have the information technology and infrastructure needed to support multiple employees who may be able to work from home.
As demonstrated, in an economic downturn businesses face numerous difficulties and challenges, all seemingly important and urgent. It is tempting to take the natural response and focus solely on today`s problems. COVID-19 is definitely nullifying old models of doing business. Adopting the right strategies can be the difference between business success and failure.
