Businesses are looking to when the “curves will flatten”. The curve of COVID 19 infected people and the curve of business loss.
The global COVID-19 pandemic has completely changed the world as we know it. Most people and businesses started the year being upbeat. Less than 12 weeks into the year, with the ink on the annual planning papers barely dried, the whole world abruptly stopped and everything started to change.
What came next? Neither the traditional gurus of scenario planning like Shell and General Electric nor all the top guns of consulting like McKinsey and BCG, in their worst worst-case scenario analysis, could have delivered a paper that imagined todays’ realities – “the world is closed for business”.
As lockdown, social distancing and self-isolation become the buzzwords of the day, business owners are counting the cost with no idea when the “curves will flatten”. The curve of COVID 19 infected people and the curve of business loss. Everyone is hoping for both to flatten soon, so they can start a process of business recovery.
In the current circumstances, the first set of actions of many businesses is to slash prices to generate cash, cut jobs to reduce overheads and cancel contracts to limit future expenditure commitments. No-one can fault business owners for such actions as many are now in survival mode. Mind you, some businesses are not just facing the impact of COVID-19, but the pandemic has amplified some of their underlying and long-term business issues.
Certain actions may save a business in the short term, but where those actions are based on knee-jerk reactions, they are simply giving the business one breath of oxygen to revive it. Without addressing the underlying issues, those actions may still result in the slow death of a business. Therefore, owners and senior executives must think differently and take the right steps to fix the heart of the business in order to have increase their chance of long-term survival.
Businesses should therefore ask themselves the following 5 questions:
- Are office /production spaces used optimally?
- Are machinery and other fixed assets operating efficiently?
- Are there points of leakage/wastage?
- Could innovative ways of working be adopted?
- Can direct costs be reduced without reducing quality?
Below, we look at these questions and recommend ways businesses can adapt for long term survival.
1. Are office /production spaces used optimally?
Businesses may be renting/leasing more space than required as part of their long-term expansion plan. Also, some businesses have large unused or poorly utilised spaces e.g. warehouses that are partially used or large execs offices that are rarely occupied.
This is the time to put that spare space to good use. Businesses should re-organise their space to identify what can be freed-up. This “freed-up” space can be sub-lease. For instance, if you have a partner organisation that is also looking for ways to reduce costs, they could co-locate in your premises.
Many years ago, our marketing agency moved into our business premises. It was win-win for both parties. We saved on agency fees and they reduced their rent.
This is a potential “quick-win” for businesses, without jeopardising long term plans.
2. Are machinery and other fixed assets operating efficiently?
Assets are oftentimes operating below optimal capacity, for example, a machine designed to operate for 12 hours a day may only be operating for 6 hours, because the business doesn’t have a market for the extra products.
These assets have already been purchased and are depreciating daily. If a bank loan was secured to purchase these assets, interest payments are being incurred. So it is important to explore ways of improving the asset's Return on Investment (ROI).
Businesses with underutilised fixed assets should find means to increase the output in order to monetise the asset potential. The business could
- increase output of the same product and invest in sales and marketing efforts to increase sales
- diversify into another product line e.g. companies producing fashion items started using their facilities to produce face masks during Covid19, thereby creating a new source of revenue with limited additional costs
- contract-manufacture the same product for another organisation (ensuring you maintain your product differentiation e.g. a secret recipe).
Similarly, those looking to start processing should explore partnering with an existing processor before investing in fixed assets. In such a partnership, both parties will benefit from lowered costs.
3. Are there points of leakage/wastage?
Leakage may be intentional or non-intentional; Non-intentional leakages are a reality in many businesses particularly those involved in production. There are defects and/or rejects for different reasons. Intentional leakages can be a result of sabotage and/or pilferage.
Every business experiences leakage, which could cost the business between 3 and 5% of revenue (sometimes higher). First, a business should work out the “optimal” output and then identify areas of leakages. These should be plugged as much as possible. The business can:
- Sell defective items at a discount price instead of discarding them
- Repurpose “defects”. A plantain farmer found that about 10% of the harvested produce was rejected due to size. The farmer previously discarded these rejected items. Recently, they decided to convert the “less perfect” plantain fingers into plantain flour, thereby creating a new source of revenue.
- Where leakage is a result of pilferage, technology such as CCTV could be used to monitor and limit such loss.
4. Could innovative ways of working be adopted?
Most businesses across Africa still rely on all employees coming to a centralised place of work. These businesses invest heavily in premium space occupied by employees who could effectively work from other locations.
Those who work outside the HQ are oftentimes travelling to the HQ for meeting, thereby increasing travelling costs, increasing time away from their base and reducing employee productivity.
The past few weeks have shown that remote working is possible through the use of technology. This means organisations could reduce office space and make staff more productive by reducing the need for daily travel into the office.
Remote working needs planning. It involves equipping employees with technology required to connect to peers, suppliers and customers. . If done intelligently, business will be able to reduce costs and increase output.
5. Can direct costs be reduced without reducing quality?
The direct cost of goods sold, such as raw materials costs, are one of the highest costs in many manufacturing companies. For some businesses, this cost could be over 50% of revenue. Being able to reduce such costs would benefit the business.
Businesses may take these costs as a given. However, a number of strategies can be applied to reduce them.
- Businesses and their suppliers are facing the same dilemma at the present time. The supplier recognises that the survival of your business is linked to that of their business. Therefore, they are open to negotiations that present a win-win for both parties. For instance a supplier may agree to cut its margins for a period of time as long as the buyer agrees to enter into a long-term agreement. Agreements like this can only be achieved where:
- Both parties are open with each other and are interested in each other’s survival
- Both parties agree to a long-term relationship. The business cannot suddenly move to another supplier when market conditions change.
- Organisations procuring supplies can consider pooling demand with other similar organisations. For instance, every baker uses flour. Many bakers operate on a small-scale possibly utilising 50kg of flour each month. However, 100 bakers pooled together will be purchasing on the same scale as a wholesaler and will be able to negotiate a reduced rate.
Above, we have steered away from some of the immediately obvious approaches – cut jobs, reduce prices etc. The alternative strategies as proposed will reinforce businesses for long-term survival. They will also help stimulate the national economy which would booster business growth in the long term.
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