Which Companies will Survive the Next Crisis

Some people would argue its too early and pessimistic to think about the next crisis, when almost all businesses are trying to come out of current crisis born out of pandemic and compounded by war in Eurasia.

This argument is not entirely baseless. It has its merit in the fact that crisis, meltdowns, catastrophes impacting a large proportion of businesses are very rare occurrences. It is highly improbable that world will soon face another crisis of this magnitude once it emerges successfully from the current one.

Pandemics, financial meltdowns, large scale recessions, huge supply chain disruptions and wars are rare occurrences, they are improbable events, unlikely enough not to be considered in the financial planning, especially in case of SME companies.

But rare events happen a lot.

In his work "The Improbability Principle" Sir David J. Head argues that even extraordinarily rare events are common place. He even suggests we should at least expect one miracle to happen each month. Head is a serious statistician and his arguments are well grounded in logic.

Moreover the law of truly large numbers (A strand of improbability principle) suggests that any outrageous thing is more likely to happen given a large enough number of opportunities.

With exponential growth in world's population, ever increasing physical and virtual connectivity along with truly international configuration of supply chains of large as well as SME businesses, there are simply more opportunities for a large scale disruption of business to take place more frequently than ever before.

In any such disruption, SME ecosystem will be worst affected as seen in the double crises of commodity shortages and covid19 induced lock-downs. Unavailability of contingencies and lack of resources make SME sector vulnerable to changes in the environment.

SME sector is the backbone of world economy. It needs to insulate itself better from these calamities that will only become more frequent in future.

As companies have little or no control over the environment they operate in, best option available to the SME companies is to take an inward oriented approach to prepare for next inevitable crises.

Companies that stand the best chance of surviving next big crises have the following areas well covered.

Hiring Practices - SME companies mostly operate in competitive markets. They need a high percentage of what Steve Jobs called (A) players; high quality, self motivated employees. Not only a company need to hire these people it needs to retain them too.

A high turn over of employees at all levels make it hard for any company to develop a winning team. There is lack of direction and culture. The market gets confused signals.

There are two main reasons of high employee turnover:

High termination rate means the company is making hiring mistakes

High resignation rate means there is a problem of employee retention

Incase there is a high termination rate, company needs to rethink its hiring process. In my opinion, hiring an employee is like adopting a child, you better be absolutely sure before making that decision.

This analogy is also helpful incase of a wrong hiring. If you decide to adopt, and the child turns out to be less than what you desired, most appropriate way forward is to train and guide instead of trying to contact adoption agency to re-confirm the return policy.

This way of thinking increases the cost of wrong hiring. It does not mean companies should tolerate (B) players once they are hired, it means think hard before you hire and only hire (A) players.

Incase there is high resignation rate in the company, it means either the pay structure is below the industry average or there is lack of job role clarity. In an environment where a majority of (B) players thrive, (A) players will either leave or go quite.

Only companies that are consistently hiring and retaining (A) players are equipped to handle tough times in the long run.

Employee Rewards & Incentives - Good and resilient companies reward effort rather than outcome. Outcome is almost always a function of luck and chance. If companies reward lucky people it develops a casino culture in the organization and discourage people from taking long term and difficult assignments.

Also it is company's responsibility to recognize and reward good performance. In a culture where the majority of rewards go to the loudest of employees, company will end up with monkeys at the top.

Organizational Learning

Companies that depend on personalities rather than well defined SOPs to get the job done are most vulnerable to any crisis. These are the companies that fold the fastest.

Organizational learning is the most misunderstood concept in business management in my opinion. Somewhere in the top management there is an intrinsic understanding of the fact that they need a learning culture in the organization. Only no one knows how to put it in words or actionable steps.

Simply put organizational learning eliminates need for organizations to depend on certain people for certain jobs.

Especially in SMEs whole functions or departments are sometimes defined based on some person. Peter for Warehouse, Dave for Purchasing. The whole job descriptions are developed on the basis of a certain person's capabilities.

There are two inherent problems with this way of doing business.

First, there is a huge gap whenever there is a need to remove a person or the person leaves due to some reason. Secondly, Its Peter's way how the warehouse is run, more often than not, its not the optimum way. There is no desire for improvement. No one in the organization knows any other way.

Learning organizations realize the need to implement a Quality Management System (QMS) in all departments and at all levels, not only at certain functions like sales or finance.

PDCA (Plan, Do, Check, Act) cycle is the DNA of any good QMS. The idea is to plan each function, perform it, check the performance according to the plan and then act accordingly to correct course.

QMS is simple to implement. At the heart of it all is the organization wide quality statement and policy. All departments and functions get their annual goals from this centralized quality policy. (Too often the focus is on what goals are (SMART), nobody within the organizations ever talks about why).

All procedures in the organization are mapped and SOPs (Standard Operating Procedure) are developed. These SOPs are refined overtime with the help of CAPA(Corrective actions, preventive action) requests throughout the organization. Whenever a mistake happens CAPA is issued. Relevant corrective and preventive actions taken, SOPs are changed if there is a need to do so. In this way organizations eliminate mistakes. This is called a learning organization, learning from mistakes and keep on removing waste.

QMS also teaches an organization to work through cross functional teams. Kaizen teams allow the company to assemble a cross functional team on temporary or permanent basis to undertake a project or operation.

Learning is the only way to growth. Continuous learning enables a company to take future challenges head on.

Financial Management

Effective financial management is key to the long term health and survival of any organization, especially SMEs. Rapidly changing business environment and scarce resources make SME companies vulnerable and expose them to existential threats.

There is a renewed focus on the financial health of SMEs across sectors, some financial fat is considered not a bad thing anymore. Winter (next crisis) is definitely coming, this fat (cash) would allow companies to hibernate and successfully emerge to take advantage of more favorable business environment.

In this new world companies should hire and retain good people, reward them for their efforts rather than results, implement a culture of organizational learning and keep some cash for the inevitable disastrous times.