Coronavirus or Covid-19 has brought a level of disruption to businesses unlike many of us have ever seen. Most of us have been through natural disasters and recessions but this is a new kind of disruption. Meetings and events are being canceled. It is recommended that employees work from home. As I type this, all the public schools in my state have been shut down, which places another burden on those who have children that will now need care during normal working hours. All major sports leagues have been suspended and the theme parks an hour away from me in Orlando are all closing. How long this will go on is unknown.
The uncertainty is a big part of the issue. If an aggressive testing regime is rolled out and those infected are identified and social distancing protocols are followed, maybe some clarity will ensue and things might stabilize in a couple months, but that is probably the best-case scenario. The fact is that there is a tremendous amount of uncertainty and both supply and demand shocks will be part of the aftermath.
It is likely a given that when the dust settles, consumers, which are the engine that has driven the US economy will be in a very different place. Many will see their discretionary income much lower and have the psychic angst of 401(K) accounts at fractions of what they were. Their collective demand will be lower, which dominos through the entire economy. Buying less means producers will produce less, which means they’ll employ fewer workers, and so on and so on. This is compounded by the lean supply chains that evolved over the past decades that will be in disarray and an oil war that will jeopardize many businesses in the domestic oil & gas industry. Basically, it would be very unwise to expect a bounce back to business as usual any time soon.
So, what can and should companies do now when facing such uncertainty? Hopefully, every leader reading this has already addressed those concerns that are both urgent and important such as:
• Reinforced or heightened policies and procedures around hygiene for both personnel and physical assets
• Established and communicated policies around travel and time off both sick and personal
• Modified all outstanding orders in light of new expected demand levels of customers
• Acquired an understanding of all regulatory requirements concerning reporting of verified infection and symptoms as well as subsequent actions that would need to be taken
• Communicated with all stakeholders (customers, suppliers, lenders and employees) about all relevant steps being taken by the company to ensure safety and stability
Beyond the urgent and important, the next step is to stress test the business under various revenue levels. I’d suggest starting by building a proforma with revenue levels of 80%, 60% and 40% of budget through the next four plus quarters and deliberate on the appropriate actions to scale expenses accordingly. These are very difficult decisions that will ultimately involve dramatic payroll reductions. It is better to identify what you will do with forethought than under the gun. Which positions will be eliminated? Which positions will be considered for salary reductions or reduced hours? Can leases be terminated or adjusted?
In conjunction with the stress test, look at your balance sheet. To what degree and how long can the business sustain loses? Are there opportunities to preserve capital by negotiating with suppliers on payable terms? What assumptions should be made on the vitality of your accounts receivable? Are there risks relative to lenders calling in loans?
At some point the clouds will pass and the dust will settle. However, the competitive landscape is likely to be much different. In preparation for the emergence of this new normal, there are two longer-term activities that executives should undertake: scenario planning and strategic planning.
Scenario planning entails putting together a list of potential occurrences that you would need or want to react to. Some of these could be:
• A main supplier dissolves or becomes unable to fill orders
• The line of a competitive supplier becomes available
• Talent becomes available
• A competitor in the market liquidates
• A service company that serves the same customers or has a complimentary offering is up for sale
• A top customer goes bankrupt
• A competitor’s top customer goes bankrupt
The bullets above are in no way an exhaustive list, but are examples that illustrate possibilities. Once your list has been put together, the two key items that need to be considered are how would you be able to identify its occurrence (some are easier than others) and what series of actions should you consider taking. Big market share swings occur going into and coming out of recessions. Those that retain capital sooner than others going in and those that have capital to deploy coming out can win big so even as we’re in the throes of some unprecedented disruption, being able to keep an offensive mindset can payoff.
Strategic planning in these circumstances isn’t doing a SWOT analysis and looking five years down the road. It’s recognizing that there is an opportunity to make changes to your business while it’s still in a semi-state of shock. It is much easier to make changes during times of disruption than when a heavy sense of status quo prevails (see Kurt Lewin’s “Change Management Model”). Three specific areas to consider are: organization structure, incorporating cost to serve and strategic pricing.
There are two elements of organizational structure change worth considering. One is based on the likelihood that the personnel on-hand at the end of the year may look very different than it did at the beginning. Instead of just endeavoring to refill vacant boxes on the old organization chart, stop and consider how effective the old organization was. Where were the bottle-necks? Was there unnecessary redundancy (or necessary redundancy because of competence issues that no longer apply)? Was the organization too top heavy? Are there manager positions that are artifacts of the 1990s that have evolved into being glorified supervisors or shift-leads? Would it make sense if your sales effort was organized functionally or by industry vertical as opposed to geographically?
Sales force structure is the second facet of organization design worth considering. Many companies have sales organizations that have changed very little over the decades. However, much has changed in the market. The expansion of competitive threats compounded by a generational change that ascribes different values to in-person communication has put pressure on many companies to become more efficient in spending SG&A dollars. Step back and ponder whether there are opportunities to implement new or hybrid selling roles to meet customer needs. Would it make sense to apply some of the sales budget to a digital marketing role? Do not let commission or incentive structures become obstacles to your creativity as making changes here will likely be much easier during the “shock” than it would have previously.
Looking into incorporating cost to serve and strategic pricing aren’t really strategic but I’ve included them because they could have great relevance in the demand and supply shock environment we’ll be facing. For a time, profits are likely to be very thin and the margin between making money and losing money very small.
It is important that visibility exists on costs, particularly variable costs. Business models where it was okay to not make money on a third or half the orders is probably not going to cut it. Understanding your costs will allow you to make decisions on service models and policies such as delivery fees or frequency and minimum or prepaid freight order sizes. If you have incorporated cost to serve into your business it is important to recognize that old cost driver values no longer apply.
By strategic pricing, I do not mean velocity-based pricing, but strategic pricing more literally. Remember, there is an imperative to make money. Gross margin, to include fee revenue, needs to cover total costs. Furthermore, if there are supply issues with limited product availability, make sure those customers that drive profits are at the head of the allocation line. Now is the time to be discriminant and make sure “A customers” get “A prices” and customers where you’re the last resort do not.
We find ourselves in difficult and unprecedented times. It is times like these that new trajectories are formed. Recognize that the situation we’re in is likely not one that is just endured for a little while before things get back to normal. It is going to be a struggle, but do not unintentionally miss the opportunity that this disruption brings.
JOIN US: Live Discussion with MDM on Friday, March 27, on Distributor Response to COVID-19 Pandemic.