How companies will have to adapt their business models after the pandemic
Posted On May 14, 2020
Article by Richard Breitschwerdt | Illustration by Louseen Smith
As Covid-19 spread across the globe, we first experienced impacts on the global value chains as China closed their production sites.
Companies in the West had to make initial arrangements to outweigh the dependence on the Chinese market, but it was not enough. After having recovered from the last financial crisis more than ten years ago, businesses all around the world suffered a cash squeeze as shops and all non-essential tasks came to a hold.
Now, the world and its most powerful nations are heading into recession and we face the highest unemployment rates, bailouts, and monetary easing since the Great Depression. Multinational corporations and banks must, once more, be bailed out by the taxpayer and the small people.
While this does not apply to all countries in general, we must note that our capitalistic system and incentives over the last decades led to the current situation.
In the following we will be having a brief outlook on how companies will have to adapt their business models given the grim outlook on the world’s economy.
A flawed system
Profit, profit, and more profit! This has been the mindset for most companies and banks for the last years. While it attracted investors and people that wanted to make a lot of cash quickly, the average taxpayer earned nothing but his small monthly salary.
According to the Institute of Policy Studies of the United States, the top 1% owned 44% of the world’s wealth in 2019, while the bottom 40% in the US had accumulated a debt averaging US$8.900 in 2016. A “negative wealth” as their debt exceeded the value of their assets such as their house and car. This although the world experienced wealth as it has never done before!
Businesses looked profitable on paper rather than be economically and ecologically sustainable. Although there have been attempts to introduce a lean mindset in companies with expensive experts trying to transform the company, many failed its use in the long run and just after seeing positive results, fell back into their unhealthy old habits.
Change is not always well received by its users and therefore abandoned unless it is forced upon by drastic changes in the environment.
How the change will be
Being slow and not adapting to the new circumstances will be comparable to a death sentence for businesses, leaving the company no other choice than doing radical changes.
At first, as we are already seeing, mass layoffs and funding cuts are introduced and the overall performance of the business decreases. A stricter approach to what is essential and critical in the company will be explored and only the value-adding compartments will remain.
We will also see a further shift from the Shareholder-approach to a more Stakeholder intensive business as individuals will seek shelter and reassurance that they will not be left alone in times of crisis. A, in general, more risk-averse business will arise, and companies will think twice about how their investment strategy will look like.
We are not speaking about a drastic change in how products are marketed to the customer but rather what is found in the back end, at the core of the business. Inefficiencies will not be tolerated anymore and straight alignments within the company will be crucial. Companies will have to spend even more money on finding well educated and fit employees as versatility and rapid adaptation become ever so important.
The Telegraph published an article about a study done by Oxford Economics in 2014, which showed that British businesses spend at least £4.13bn every year in staff turnover costs, which was 0.22% of Britain’s annual GDP at the time.
A share that is set to increase as GDP forecasts globally deteriorate and businesses require modernization in their staff with “digital” becoming the new “cool” in a long-overdue change of workflow.
On a bigger scale
A different topic but very important nevertheless: the shortening of the supply chain. It is debatable whether supply chains will be compressed, and offshoring will be flipped into nearshoring.
Although labor cost has seen an increase in China and multinational corporations sought workforce in other countries, it is a question of adequate infrastructure and feasibility to set up camp for largely domestic production to decrease dependence on other nations. Is it viable for Apple to remove its manufacture from China and assemble their products in the US? Rather not.
Developing their latest Mac, Apple was unable to shift its production to Texas as a specific screw was not being able to be produced in the required quantity and quality. Instead, it had to be imported from China, as they could make custom screws quickly, in large quantities, and on-demand.China has become a, if not the, manufacturing power in the world, and makes it ever so difficult for manufacturers to move out.
But one thing can be reassured: meetings and estimates will be set up as to whether it would be a smart decision to do so.
It is uncertain how the coming years will evolve and how we individually will be able to cope and adapt to these unprecedented times. Companies will stumble and many will fall, making change inevitable.
Business models will have to be revised and those too slow to change will crumble. Will the changes last and will have an influence on how we will create businesses in the future?
Is it enough to only lay off workers while attempting to maintain essential tasks and operations running? Or is this the time where the world and businesses are so raddled that only the richest will survive?
That is a question only the future can answer as we and the businesses surrounding us seek to adapt to the new circumstances.