"Survival is not mandatory"

So, what will happen to businesses as we come out of lockdown?

Well no-one really knows. It largely depends on the sector of course. Some businesses will be able to come out sooner than others and some will come out stronger or weaker. Some may get back to pre-CV revenue levels. Other won’t for a good while or maybe never will based on their current operating model.

Businesses always need to adapt and evolve to changing market conditions. It is rare for a business to have a long-term moat such as a brand like Coke or a patent. 

This crisis has been a real eye opener for everyone including business owners. There have been winners and inevitably more losers. Despite the various government measures some unfortunately will not get through it. Others will have to change their business models, if indeed they can.

For some businesses it may have actually been a blessing in disguise and actually saved them if they had been struggling pre-CV and for whatever reason they now find themselves with increased demand for their products or services.

For the stronger businesses coming out of lockdown they may benefit from weaker competitors leaving the market thereby reducing competition and capacity.

Macro economics

The national and international economic backdrop post crisis will significantly change with interest rates, taxes, oil prices, commodity prices and exchange rates all moving…that is a lot of variables for a business to navigate.

Supply chains

Added to this are the complexities around supply chains. We’ve spent the last 40 years or so globalising supply chains. This crisis has highlighted the vulnerability of our reliance on global supply chains and the risks of just in time stock management. 

The reason for globalisation of supply chains was cost minimalization and containerisation in the shipping industry thereby allowing lower cost and more efficient transport.  Labour rates have been increasing in the Far East as has the rise of the middle classes and internal consumption of goods, thereby driving up prices.  With investment in energy-efficient highly mechanised manufacturing the UK as we have seen in car production will we see a return to more manufactured products in the UK, now fashionably known as onshoring? Time will tell.

Business plans used to give a cursory nod to alternative sources of supply. Well these plans have certainly been tested this year. How real and cost effective those alternative sources are can make or break a business.

Company profitability

Inevitably there is going to be a hit to profits but the key unknown is the quantum and time to recover to normality, and how similar that new normality will be to our old normality.

It’s likely, if we do return to similar revenue levels, that return on capital employed will reduce; how much remains to be seen. This this is because stock levels will typically increase to protect continuity and working capital headroom facilities will increase either by holding cash reserves or by businesses taking on less leverage.

Changing business models

This crisis has created an opportunity to revaluate our business models.

Perhaps think outside the box, think about the most audacious things you could do with your business and then work back until you find a range of actions you can realistically take.

Here are some possible avenues to explore. Can you:

·      collaborate with other businesses that you can sell on behalf of or who can sell on your behalf (i.e. get the benefit of each other’s sales channels)?

·      drop ship for other companies or vice-versa?

·      sell other businesses’ products and just take a risk-free commission e.g. white labelling websites and vice-versa?

·      fulfil for other businesses or can they fulfil for you?

·      move up or down the supply chain – without alienating customers can you move further up the chain and create more margin and sales?

·      use technology to sell remotely or sell online and using better customer data analytics?

·      offer to take or give stock on consignment, sale or return, or other shared risk sales strategies?

·      order in smaller batches to reduce stock holding cost and/or risk (or larger batches to secure supply and get better prices)?

·      ask your supplier to store your stock so you can call it off to reduce your own warehousing requirements and cost?

·      dual source to reduce any supply chain issues even though on an ongoing basis it might slightly increase your average cost prices (and can you pass those increases onto your customers as they will be enjoying a more secure supply chain?)

·      you “in source”, i.e. bring back some production in house so that your supply chain is more secure.

The opportunities are endless and as Walt Disney said, “If you can dream it you can do it.”

The above ideas should help you focus on what you are really good at and to leverage that e.g. innovation/design, low cost manufacturing, extensive distribution channels/infrastructure or sales and marketing expertise? Conversely, where are you are weak or where do you have a relatively high cost that you can either outsource or sub-contract out? There could be other complementary businesses out there that can provide a better and lower cost solution for you.

This also could de-risk your internal operations and lower you fixed operational cost base that should make you more agile over the medium term which could be crucial as demand for your products or services might be difficult to predict and plan for the foreseeable future. Flexibility of operations and cost base is key to maintaining profitability as revenues fluctuate. 

Also consider how better you can utilise your workforce. See if there are any ways you can minimise any reliance on key employees. Can you train employees to carry out other functions if necessary so that you can more easily flex your workforce?

More fundamentally, should you explore merging with a competitor or buying a competitor? There could be considerable cost synergies to be shared. You might want to consider selling as a competitor or other large business might be prepared to pay well for the strategic benefit your business would give them or maybe you might need to sell as it might be the only way to survive.

You’ll have heard stories of beer bottlers switching/adapting their production lines to make hand sanitiser in recent weeks or clothing manufacturers making PPE equipment. Barbour and Mulberry have successful begun manufacturing and supply PPE to the NHS although BrewDog has had their hand sanitiser rejected so it isn’t that easy to do. It’s probably too late now and very few businesses have the capability to switch production however, for the next time, and there will be another “event”, have a think about what else you could adapt your production or service lines to. Maybe you should create a separate business plan of alternative revenue generating initiatives which will always be dependent on the specific circumstances, but nevertheless use the time you have now to plan for the unknown. It’s not something you’d choose to do as it’s likely to be lower margin and lower volumes, but it could just get you through the next adverse event.

You do of course need a thorough risk analysis to help mitigate any adverse events that may occur in the future as I’ve previously written about.

Conclusion

“It is not necessary to change. Survival is not mandatory.” - W. Edwards Deming, a quote from his book “Out of the Crisis”, 1982.

Above all you need an agreed vision (that is bought into by everyone in your business) and a plan to deliver that shared vision and a clear leader and leadership team to deliver the plan and monitor and adapt it as the world evolves.

From this crisis we are likely to see new start-ups that become giants as we have from previous recessions e.g. Google, Facebook and Uber. Whilst it might seem too hard right now, these challenges should create great opportunities that can be seized by those who can and want to. Good luck.