We think we know what has happened to business in the past six weeks: demand collapsed; supply chains fractured and furlough stepped in. We may even think we know what will happen; most businesses will bounce back slowly and some will run out of cash and die. But Tony Danker, Chief Executive of Be the Business, argues that the reality is far more textured and far more interesting.
In the last five weeks we have heard from thousands of firms, interviewed a small number in depth and tested our emerging findings in quantitative research; this included a sample of 500 senior managers in businesses of a range of sizes. What we found was a very different set of states. Economists often assume that recessions are an act of creative destruction that whittles down the wheat from the chaff. But Covid-19 appears to be more like a game of musical chairs: suddenly the music stopped and the fate of many businesses was largely determined. The wrong sector, the wrong workplace type and, more often than not, an accident of cashflow; all these factors determined a firm’s prospects rather than performance.
Any attempt to create typology of firms and how they have fared, needs to recognise that for some Covid-19 was always going to be disastrous.Luck has played a role for many, with some firms having just spent down reserves to invest in new premises, others being cash rich on the brink of a major move. The fate of firms to date has in some ways been determined by their features, such as workplace environment or sector, but in many cases it is also the result of strategic choices made by owners on how to respond.
Our research suggests that luck aside firms can be broadly segmented into four camps. First, are the Hibernators (28% of firms in our survey). These have closed their business and furloughed most of their staff. Either government left them no option or because there was no chance of remaining open whilst protecting staff and customer welfare. Firms in this segment often have a physical storefront, are labour-intensive and their core product or service requires proximity between customer and staff. Lots of hospitality firms feature here, quite a few hairdressers but also, food retailers or manufacturers who feel it is better for societal or financial reasons to sit this out for a while.
The second camp is the Survivors (32% of firms in our survey). These have seen dramatic falls in turnover or the temporary suspension of parts of their businessthat primarily relied on physical fulfilment of orders and face-to-face service. Businesses were facing closure in most cases, but leaders were sufficiently nimble to make changes to product or operations to deliver a narrower range to a smaller customer base. Lots of business-to-business service providers such as PR firms or architects here whose clients are cutting discretionary spend.
Third are the Pivoters (21% of our sample), which were able torespond rapidly to the pandemic. They redeployed staff, adjusted services or transformed production to meet the needs of a new customer base. They may have already been planning a product innovation or were simply bringing forward investment. Others may have had the financial firepower, staff and productive flexibility to pivot. The changes they made have allowed them to remain open and, whilst they may not be permanent, they have consolidated positions as innovators and dependable local firms establishing new opportunities for the future. This ranges from food service companies switching from restaurants to home delivery to widget manufacturers developing hand sanitiser products.
Finally, there are the Thrivers (6% of firms in our survey) that, by luck or good judgment, have been able to ramp up production of existing products or services.These firms may have been deemed essential and at present they are working hard to meet high demand. Whilst some of these were in the right place at the right time, all have embraced flexibility, and most are working to fulfil orders at an unprecedented rate. Staff have shown capability to adapt rapidly to a new working culture with limited interruption to productivity. They make personal protection equipment or other health supplies; or they have long been online providers of products and services now in demand.
A further 12% of businesses are experiencing business as usual and report no significant change to their business environment.
Four bridges to the future
If that is the present, how do we bridge from here to the future? When the music starts again, how do we get firms standing up and moving at pace? We see four emerging themes that lie at the heart of the business recovery and present some major choices for economic policymakers; brave choices that honour the maxim: never waste a crisis.
Firstly, there is a widespread innovation opportunity;both pivoters and hibernators are on to new things. Usually we expect innovation to emerge from the glamorous end of start-up Britain; firms in high tech or life sciences, backed by specialist R&D funding. Pubs, bakers, and lots of different makers are innovators now. The innovation playing field has been levelled, at least in terms of opportunity, if not finance.
Secondly, greater confidence in technology could become technology adoption;we are all on Zoom now. Decades after we could have been and decades before predicted to be. But online video conferencing does not get close to the potential productivity opportunity of business technologies; those come from everyday business systems and processes being enhanced online such as customer relationship management (CRM) software, cloud-based finance and HR software. These make up the productivity tech where Britain by the way, lies near the bottom of the European league tables. Now, the firms we have interviewed are recognising the potential for these tools. Some see them not as major innovation but essential to the resilience needed to run a firm from home. So, there is an opportunity for greater adoption there.
But all our insight in recent years tells us that confidence and capability in technology is a precursor to adoption. Perhaps the most interesting development of the past six weeks is that tech laggards have had a Eureka moment; they have had to use tech and have got pretty good at it.
Thirdly, resilience is no longer a buzzword but a real imperative. There is already a focus on preparing for more shocks to come; from our conversations and wider survey data, it is clear that firms are seeing threats and opportunities at every turn. They told us of their fears of second waves, a quick Brexit and prolonged basin-shaped recoveries. They are also aware of their resilience failings – how they felt when the music stopped – and they don’t want to feel that again. To meet this challenge, firms want to become more resilient – in terms of their finances, their operations, their staff wellbeing and their whole business model. Is it sufficiently diverse to withstand whatever comes next?
The fourth theme to emerge was the productivity paradox, where firms predict big efficiencies but low investment; the financial realities are likely to mean widespread cost efficiency focus. All costs have to be targets including staff and already most business owners know they cannot bring everyone back post furlough. All this may be good for productivity. It could also be enhanced further by greater demand for technology solutions. However, here’s the rub: at the very moment when both innovation and technology are in highest vogue, investment is likely to fall further still. It is both the best of times and the worst of times to change the productivity and competitiveness of our business sector. And you either have to believe that firms can realise a lot of cost-free innovation or that policymakers find ways to incentivise these behaviours, knowing it could be a unique but time-bound moment of opportunity.
Of course, we are only arriving at the middle of the beginning. Not many predict a V shaped recovery given what looks to be a tapered exit from lockdown. So, the music will wind back up slowly; too slowly for many firms who will likely die. For the rest, however, expect a battle between two competing mindsets: risk aversion versus confidence and ambition. This determines whether we have a resilience recovery or an innovation one.
Tony Danker is Chief Executive of Be the Business, a business led movement set up to transform the productivity and competitiveness of UK firms