Companies coping with Covid-19
11th August, 2020
It is still too early to quantify the lasting effects the Covid-19 pandemic will have on the global economy, consumer and company behaviours. What has held this economic contraction apart from others in history has been the speed and depth of the decline and its global prevalence – no region has been spared. This has resulted in the need for company managements everywhere to develop a new ‘playbook’ to deal with, not only, the immediate impacts of the crisis but also its implications for the medium and longer term.
Demand or supply?
When we think about the operational implications the crisis has had on businesses, we tend to look at it through the lens of coping with significant or total cessation in the demand for their goods are services. As the wave of lockdowns took hold, we saw businesses forced to close their doors, shut down manufacturing facilities deemed to be non-essential, or stop work on construction sites - behind these were the myriad of suppliers that no longer had customers to serve.
Unsurprisingly, the actions of company managements were straight forward. They right sized the business by furloughing workers (taking advantage of various government-backed programmes where possible), moving skeleton staff to work from home, and reducing all non-essential costs such as travel and entertainment.
But there was also a large group of companies that faced a problem of a different nature – a supply side shock. In some cases, demand for their products or service stayed flat, but many saw the demand increase. A nice problem to have you would think, but not if you had to protect your workforce from contracting the virus, or experienced significant impediments to your supply chain. While the workforce on your factory floor were initially glad to be keeping their jobs when many others were not, this gave way to a sense of unease as to whether their health was at risk by going into work daily.
This was made even more difficult for many global companies as their operations may have been deemed essential in one country where they operate but non-essential in another – an issue that also proved difficult for some of their suppliers that they rely on.
While companies with a demand impact were cutting costs, many on the supply side shock were forced to increase expenses as they re-configured production lines and other facilities for social distancing or equipped the home offices of their staff working from home.
The financial reaction?
While the operational reaction from companies depended on whether they were facing a demand or a supply shock, the financial measures were very similar. As companies struggled to forecast the impact crisis would have on their profits, cashflow became a precious commodity.
We have seen a raft of companies cut or suspend their dividend payments and share buyback programmes, capital expenditure plans have been deferred, many have sought to reduce debt levels to protect the viability of their business and in some cases have needed to raise funds in the equity market or seek national government bailouts. Even with all these actions, there is no doubt that we will see companies fail in the coming months as the financial burden becomes too great.
The great re-opening
But as time has moved on and the number of cases first stabilised and then receded, companies have also moved from a phase of ‘dealing with the lockdown’ to ‘living with the virus’. With economies slowly reopening, managements align the business to the changed landscape. Those with a global footprint have had an advantage in this regard.
Most people will tell you that this crisis began in mid-March because that’s when the lockdown was imposed in Ireland. But the reality is that as a company with operations spanning the globe, you were likely dealing with a lockdown in your China operations in January and your Continental operations in February. These companies have been able to apply the lessons learned in their Eastern operations to change the work practices firstly in Europe and then the US.
Key to the survival of many businesses will be how long it takes for their customers to return once they have reopened their businesses and whether they will get access to working capital finance to keep the wheels turning in the meantime. Again, governments will be crucial here and we have seen programmes already announced in the European Union, the UK, and the US.
Dawn of the ‘New Normal’
So, what could be the longer-term implications for how companies do business? Over the last few months we have witnessed the acceleration of certain trends in place before the crisis, such as digital transformation and electronic payments replacing cash. New ways of engaging with customers (virtual meetings, digital applications forms) will open new markets to companies and potentially change the way they access existing markets.
Embedded connectivity in the form of the Internet of Things (IoT) and Augmented Reality (technology allowing users to experience a digitally altered reality) will revolutionise manufacturing, as social distancing limits the number of people that can be in production facilities. This, along with increased use of mobile and broadband, will require investment in telecom infrastructure, while increased ‘Working from Home (WFH)’ will focus attention on the security and integrity of companies’ IT infrastructure.
Finally, we will see greater focus on supply chain management, as companies seek to ‘re-shore’ some elements of their inward and outward distribution network and avoid single source inputs where possible/practical.
For companies that emerge from this crisis with strong financial balance sheets there will, no doubt, be opportunities for acquiring weaker competitors or grow organically by investing in the business at a time when their competition cannot.
One thing is for sure – it won’t be the ‘same as it ever was!’