The novel coronavirus epidemic has rampaged from Wuhan through China and beyond since the end of 2019 and the uncertainty of its end is worrisome for the Chinese public and global communities. Apart from the disappointment that the Spring Festival was totally ruined for most Chinese, the long term consequences of economic development will also be of significance. From a business perspective, small and medium-sized enterprises (SMEs) are particularly vulnerable to the impact of the epidemic. Some economists, business scholars and bloggers have offered various advice to SMEs and called for the government to come to their rescue. The municipal government of Ningbo, for example, was one of the first local governments to promulgate a list of urgent measures to ease the difficulties faced by SMEs: partial exemption of social security contributions, reduced interest payments, deferral of taxes, favourable loans, foreign trade subsidies, legal services, and others. Overall, there is a pessimistic sentiment with respect to the survival of SMEs. There is news of SME bankruptcies, the disastrous impact of the coronavirus on the restaurant business and tourism, and even an extremist claims on social media that SMEs will be more or less wiped out in the epidemic’s aftermath. Granted, the disaster matters and yes, the government should do something. But what are the real lessons for SMEs?
If it doesn't work, turn to yourself
This well-known doctrine of Mencius is widely applicable and particularly relevant to SMEs in the face of a serious crisis such as the novel coronavirus outbreak. With limited financial resources and manpower, SMEs have the tendency to use external factors as excuses for their setbacks and failures. Thus, they rarely examine their internal attributes on an in-depth level. Amid the current virus outbreak, SMEs are typically obsessed with losses of revenue, labour costs, waste of raw materials and possible government bailouts. Few are willing to probe into their business fundamentals such as their value propositions, their core team structures and competences, and industry trends (regardless of the epidemic) etc. For SMEs in relatively promising industries, there is actually no need to doubt their capabilities in enduring the crisis and recovering in the aftermath as long as their businesses are built on solid foundations. For those in obsolete business sectors and/or have serious weaknesses, the virus disaster could give them a dose of reality and it’s fine to seek new opportunities and reset everything. This misfortune could be a disguised blessing!
Let go and move on
Business people don’t normally question the value of strategic analysis. However, there is a lack of understanding about how to set out a good strategic analysis. The very starting point, though at times seems a bit cruel, is to understand where you are, not where you wish to be. A friend of mine was operating a small retail business years ago and once incurred a big loss as a result of overstocking. He was so obsessed with the mistake and could barely deal with the business’s near future. Amid the novel coronavirus outbreak, many business owners and managers in restaurant and tourist businesses wish they could have been less aggressive in their business planning for the holiday season to alleviate their losses. SMEs are often reluctant to accept sunk costs. Given that the costs are irreversible, SMEs should just get over it and move on.
"Shit happens" and cash is the king
I have been teaching a range of strategy classes at undergraduate and postgraduate levels and also conducting managerial training. I often use a computer simulation to enable students and managers to learn about developing and implementing business strategies. Often times, the students and managers have trouble managing cash flows. A fundamental problem is that people tend to project cash flow based on either promising or reasonable business scenarios. Rarely do they consider what if “shit happens”. Put differently, managers should try to make sure that cash is enough even for the worst-case scenario. A recent joint survey with nearly 1000 Chinese SMEs by Peking University and Tsinghua University shows that more than two-thirds of the SMEs would run out of cash within two months if a disaster were to strike. In case the epidemic doesn’t end according to the best scenario described by Dr Zhang Wenhong of Huashan Hospital in Shanghai, the majority of the SMEs will likely be out of business. The researchers conducting the survey called for the government to bail out the SMEs as the virus outbreak was out of their control. I do agree that the government should help to a certain extent. But the real lesson here is that SMEs are poor at managing risks.
Focus on innovation and seek new opportunities
Despite the fact that SMEs are generally vulnerable to the virus outbreak, high-tech SMEs seem to fare much better because they tend to employ professionals who can work independently and/or flexibly without having to come to the worksite. Nevertheless, even high-tech SMEs may have to cope with lower efficiency and higher costs as virtual/online coordination is suboptimal. Furthermore, high-tech SMEs normally deal with industrial clients rather than end-users and thus may suffer if their clients are in trouble. For high-tech SMEs in the face of the epidemic, a viable approach is to continue to focus on innovation and seek new opportunities. For example, Good-Ark, a Suzhou-based diode specialist was able to effectively cope with the sharp decline of industrial demand caused by the 1998 Asian Financial Crisis through enhanced product innovation. As a result, the company was able to defy the odds and grow its business. Actually, innovation could be the key for all SMEs to endure a serious crisis. Many restaurants, for example, have completely lost their dine-in business during the current epidemic. Instead of sitting idly by, some have tried to develop meal delivery services which may turn out to be more than promising in the long run. For those with international business or planning to pursue international expansion, the crisis might enable them to strengthen their development through international business.
Develop a corporate culture and stay focused
There is a common misperception that corporate culture only matters for mainly large firms. I happened to attend a guest speech by a venture capitalist in Boston not long ago. To my surprise, the speaker was talking at length about the corporate culture of new ventures. This makes total sense in hindsight. When I was teaching in the U.S., I studied a small tree plantation company. This company was nearly out of business after a large swath of its tree farm was destroyed by a fire. The small business stuck to the principle of responsible forestry management in the face of the disaster. The strong culture not only helped the small company keep its core employees but also attracted a top forest scientist to join the team. The Suzhou-based Good-Ark started to establish its humanistic care culture in 1991 when the company was still in its humble beginnings. Humanistic care has played an important role in motivating and maintaining its employees and sustaining its business growth over the past few decades. FOTILE, a Ningbo-based kitchenware company, is also well-known for its strong corporate culture. The company emphasised high quality and high-end branding early on and has stayed focused on its core business and as a result, has become a hidden champion in the kitchen appliance business.
The lessons for SMEs as elaborated above do not imply in any sense that SMEs should not strive for external help such as the government support in the face of a major crisis such as the novel coronavirus outbreak. Nevertheless, it’s perhaps more essential for SMEs to reflect on their business fundamentals including value proposition, innovation and corporate culture.