The Businesses that Will Survive in the Post-COVID-19 Economy
The COVID-19 pandemic has had a massive impact on day-to-day business and the strategic options of firms across almost all industries and countries. We see severe interruptions in supply chains, major challenges in the organisation of everyday business, and complex demand structures because of regulations, changes in customer behaviour, or the reemergence of country borders. These challenges along the whole value chain increase the cost of doing business for all firms – often to a point that threatens their existence. In such circumstances, investors, managers, employees, and other stakeholders all want to understand how to improve the probability of companies venturing safely and without any major financial hiccups through the crisis.
Below, Jonas Puck, Professor of International Business at Vienna University of Economics and Business, outlines a number of factors that he believes will help businesses achieve success in the post-COVID-19 economy.
On the upstream side, interruptions of supply can cause severe operational and consequently, financial challenges. Firms that are dependent on very few suppliers, rare raw materials, and/or geographically concentrated supply channels are most vulnerable in this situation. The strong dependence on production from China in the textile/garment/clothing industry or in the field of central processing unit production has led to major delays and supply-chain interruptions – and severe financial consequences for players in the industry. Firms that have diversified their supply-chain risk by sourcing through multiple channels from multiple regions will have good chances to be less affected on the supply side. Note that the ‘solution’ to the supply-chain risk is, in my eyes, not the ‘nationalisation’ of supply chains as proclaimed by many politicians around the world. From my perspective, ‘nationalising’ supply chains would conceptually put firms at the same risk as current practices as they would again be dependent on a very specific set of suppliers within a single context.
In operations, the central indicator for survival will be flexibility on different levels. Flexibility is connected to the cost-structure in firms. Firms that have fewer fix-costs (as compared to their industry peers) in their operations will be less affected as they can address changes in supply and demand more flexibly and without severe financial consequences. If companies have high fixed-costs in comparison to their industry peers, they will still have a good chance of successfully venturing through the crisis, as long as they can efficiently leverage support from COVID-19 relief packages as offered by many states, countries, or supranational organisations. Airlines are a good example of this- we can see how they struggle because of the high proportion of fixed costs in their business models. At the same time, however, the airlines that have good connections with political decision-makers may, in the end, benefit from the financial distress of others.
The ‘solution’ to the supply-chain risk is, in my eyes, not the ‘nationalisation’ of supply chains as proclaimed by many politicians around the world.
On the output or customer side, I see a similar logic to the diversification logic described for the supply side. A larger and more diverse set of clients across different countries, industries, and firm characteristics reduces the risk of major demand interruptions. It also improves a firm’s competitive position if competitors do not have the same options. Some firms have also increased the diversification of their customer base during the crisis and have sold their products in new industries and/or to new customer segments. Some hotels, for example, have adjusted their offering to health workers. The Vienna Trade Fair has turned part of their space into a hospital for coronavirus patients with mild symptoms. While this could be considered as too costly or out of strategic scope in ‘normal’ circumstances, such active diversification moves can help to reduce the risk of severe losses during the crisis.
Next to challenges in the operating supply chain, we can find indications for vulnerability and/or survival in the way value chain’s support functions (e.g., finance, IT, etc.) are designed and how they are currently characterised. Very straightforward but extremely important indicators on the side of finances are cash holdings and the ability to postpone major investments. If firms can postpone investment projects or payments for such projects, this will strongly increase their financial flexibility. Major cash holdings are usually not only associated with positive connotations, but they are of major importance today as liquidity helps to remain strategically agile in the current uncertain times. This agility allows firms to react to developments in the crisis and keeps them alive and potentially ahead of the competition. Similarly, a well-designed and implemented IT support system helps to survive the crisis. Digital connectivity, especially in times of reduced physical connectivity, can support decision making, indicate challenges in supply and demand at an early stage, and forecast financial challenges.
I believe that successful firms in the current environment are characterised by their ability to diversify their risk in supply and demand, as well as by their operational efficiency and flexibility. While diversification and flexibility are associated with costs and therefore are not always something that firms focus on in ‘normal’ times, they are of utmost importance today. It will be interesting to see how firms work towards the optimal balance between flexibility and efficiency as soon as the crisis ends.