How to hibernate the COVID-19 crisis
Thoughts in the first days of the pandemic.
We all know that in a few+ months life will get back to almost normal. Demand will be restored, the supply chains will be synchronised again. Businesses have never had a crisis with such an obvious known known.
Unfortunately, this fact rather complicates the decisions we, business owners, need to make immediately.
Some time ago we took responsibility to build organisations. Now they might collapse in weeks or months and harm people who believed in us and our vision.
(Good luck for those companies who rely on governments.)
I’m writing this on the day when there are 179 COVID-19 registered cases and a single death in my homeland Lithuania. Similar numbers to what was seen in Italy 4 weeks ago (today the death toll from an outbreak of coronavirus in Italy has leapt by 602 to 6,077). We Europeans still pray for Italy, but very soon each will pray for their own country.
It is the 8th day of quarantine and 13th for my self-isolation after travelling abroad. The kids went to bed so I can finally work from home.
We’ve got a group of companies that operate in these global industries: safes manufacturing, interior hardwood products manufacturing, ERP, TOC business consulting (operations) and Sales Factory service (sales & marketing).
Until respirators are out of stock country-wide, our welders are privileged to use some sort of masks.
Being diversified we get a sense of various supply chains.
These are undesirable effects that appeared the first week of lockdown:
Regular demand dropped (people stopped buying non-essential products; shops were forced to close)
Most companies' sales volume within next 1-3 months is uncertain (excluding those that produce essential products)
Managerial decision time horizon is max a week
Most purchases for a longer period are postponed
Here we have a vicious cycle.
Those who survived the economic crisis back in 2008, we can’t use a lot from that experience.
Here’s why:
Offline B2C trade is off. Only grocery stores and pharmacies left open. Sales dropped to zero in most non-essential product categories not due to changes in customer preferences, but because of force shut down of the channel. (PLACE)
Customer face-to-face service sector is off. Restriction measures are applied in most developed countries. (PRODUCT)
Offline B2B sales are off. Nobody is allowed to leave the country [to find new customers]. In most countries you can’t even leave your home. (PROMOTION)
(Kids at home eat your management attention even more than crisis management).
So far the PRICE is the only P from 4P Marketing Matrix that was not yet eliminated from the success formula by crisis (my government promised to get back to price regulation idea later). No wonder why most businesses feel desperate like trying to find a solution to burn a fire without fuel, heat and oxygen.
There’s yet another difference between the 2008 and 2020 crisis:
COVID-19 response measures are applied temporarily, and so the demand will be restored in 3-9 months. Nobody knows the exact date, only the fact.
(I write down these obvious things just to sync before we jump on the directon of the solution.)
I’m sure you saw many load vs. capacity charts recently, here you go with a few more.
This chart represents the dynamics of production capacity and sales over time. In successful companies sales usually grow little by little while capacity increases always in blocks. You add a machine, a production line, overtime, or another shift, and sales need some time to catch up, always under pressure. To synchronize load (demand) and capacity (operating expense) is always a challenge, not only in healthcare.
So in order to flatten the curve of COVID-19 cases to meet healthcare capacity we now face huge excess capacity in the industry. Excess capacity means nothing but extra operating expense - payroll and monthly bills regardless of whether you have orders or not.
Which group represents your current business?
Trimming extra capacity often means layoffs. My friend from the first group #1 who owned 2 best-in-town pubs, closed the business and fired all employees the very same day when quarantine was announced. He left with €50k loss but did not lose a single euro since. He did not wait for gifts from the government, he just let it cover labor/unemployment expenses during the hibernation. Being on zero my friend today is much more profitable than any restaurant who still tries to suppress the lockdown damage.
Are there any supply chains not affected by lockdown? No demand drop so far reported by companies that supply for the projects that are scheduled to complete in, say, year 2022, 2023. If your business supplies for marine or huge construction projects, welcome to the group #3.
At the same time while off-line public services sales went to zero overnight, some companies face extreme spike in demand. Let’s call them group #4. Don’t be surprised for deja vu.
Businesses that are overloaded by orders:
daily food products
liquid disinfectants
guns and ammo
tissue paper
notebooks
local transportation
packaging (plastics)
thermovision cameras
VPN services
bankruptcy lawyers
not to mention respirators, medical ventilators
One doesn’t need to be a genius to forecast growing demand in products related with disinfection, special work clothing, contactless delivery, medical gear.
If your business is not listed above, you’re probably facing the following dilemma.
In order to be successful next year a company must survive pandemics first. To survive it must trim capacity and layoff people. On the other hand for a company to be successful it needs to recover after lockdown as soon as possible or at least faster than competition will. To quickly recover it must keep the people for the whole lockdown period.
Is there a generic solution?
For companies from the group #1 I think there is. After layoff, the government could pay your ex employees directly, on time. Regardless of unemployment benefits in certain countries, it should be enough for food & internet expenditure. If mortgage or rent payments are postponed, the quarantine will kill the rest of regular expenses. After lockdown is over people will be invited to rejoin the team and they will if parties maintain trust in each other.
Basically, group #1 (future startups) has no dilemma above, as well as group #3 (business-as-usual’ers) and #4 (firefighters).
So it is only tough timers (#2) who are doing headcount planning rather than reading Linkedin. I hope they read encouragements bellow before making a tough decision.
#1. Take care of your team.
Be careful in cost cutting especially if your organisation was lean already. “Firing good people is not cutting fat, it is cutting muscle”. There should be a solution to keep all people by agreeing with them to temporarily reduce all salaries and use governmental incentives. If there’s a significant delta left between regular salary level and current, company may accumulate it and return after recovery. Do everything you can to keep your team with you!
#2. Innovate
When war on COVID-19 is over, the world will be different. Consumers will have new major needs that were absent 2 weeks ago. The products and services to satisfy those needs are not yet created.
For innovation we use Theory of Constraints Innovation framework, developed by Goldratt Consulting. It is as powerful in finding blue oceans as Drum-Buffer-Rope in production planning. You don't need to be a genius. You don't need to have that big idea. You even don't need to have a new idea at all! And still you can win new markets that don't even exist now.
All you need is an innovation process, a team and time. By saving the team you bought thousands of expertise hours that now can be focused on proactive deep mastermind thinking. Remember how 2 weeks ago the management struggled to find a slot in their calendars to discuss anything global.
#3. Keep selling!
When you find yourself in the middle of the vicious cycle (see above), the future might seem hopeless. In this most difficult time I suggest you compare your production capacity with the global market demand. Good news: your max capacity should be n times less even if your market drops 50%. To win more market share, first you need to communicate your offer more productively than competition.
The French, Italians, Spanish, Norwegians while in quarantine postpone any new contact from a potential supplier, true. But the Finns, Swedes, Czechs, even Germans decision makers do speak online. Not to mention Russians who consider themselves immortal. Finding new customers was never easy, now it’s even harder. Or maybe not - in case if your competitors have lost their spirit and stopped selling earlier than you did.
What’s really challenging these days is to keep adjusting customer segments, territories, sales processes, offers and pricing - all together to find what works. And then adjust again according to the reality that has just changed. Fixing the process twice a day is new normal.
(What’s really surprising is almost instant average email response time from senior executives. In their replies to appointment requests executives promise to respond later because they are “in the online meeting now”. Miracles!)
#4. Work like startup
Startups usually sacrifice short-term rewards for long-term benefits. For them it is fine to burn money for a vision. Upside might be so huge that strangers invest and risk real money.
Dear owners from the #2 group, what vision do you have worth burning significant cash and probably making a loss in FY2020? The lockdown gives us so precious time we never had to really focus on building organisations ready for the new world.
The day after tomorrow is coming.