When COVID-19 took over the world, countries went into lockdown. From schools to businesses and way of life, COVID-19 significantly impacted everything. The unprecedented spread of the virus within such a short time left many people and businesses unprepared to deal with uncertainty and volatility on this large scale. Not only was it hard to plan, but they also had to deal with financial challenges. According to the International Monetary Fund (IMF), the COVID-19 pandemic caused the worst economic downturn since the great depression, even worse than the Global Financial Crisis in 2007. IMF estimated that the cumulative loss over 2020 and 2021 is around nine trillion dollars.
Small Medium Enterprises (SMEs) took the most significant hit among businesses, especially younger startups and women-led or minority-owned businesses. These businesses are owned independently and are small but essential market players in their industry. Compared to larger organizations, SMEs have lesser resources, like revenue, assets, and employees, making them susceptible to the effects of the pandemic. However, their small size could also be an advantage; they have lesser low-sunk costs and can be more agile when adapting to changes. In fact, some SMEs flourish during an economic downturn. Those that do thrive have stable and long-term financing structures, improved access to customers, and a flexible approach to strategy. (Chaturvedi & Karri, 2021)
Challenges Faced by SMEs
As crises arise, businesses need to channel their intrinsic resources to strategic areas to keep the business afloat. But to do so quickly, they will need a certain level of readiness and infrastructure. As Chaturvedi & Karri outlined in their study about “Entrepreneurship in the Times of Pandemic”, there are four main challenges that SMEs have to overcome, to survive the pandemic. (2021)
Organizational Readiness
Organizational readiness refers to the ability of organizations to quickly adapt to human, physical, or financial changes that occur, as in the case of the pandemic. Being fluid in times of emergencies is highly necessary for smaller organizations. As SMEs are smaller in scale, they may be able to redirect their resources quickly and realign strategies, capital and capabilities towards the new strategy. However, they must complement that flexibility with a willingness to adapt, innovate and make quick and sound decisions.
Infrastructural Support
The global lockdown and travel bans significantly disrupted supply chains, making it difficult for SMEs to obtain raw materials and access markets. Governments must step in to provide regulations and feasible transportation and facilitate skilled labour during an economic slowdown.
Furthermore, the pandemic forced businesses online. When governments implemented remote work and social distancing initiatives, companies had to adapt to alternative workspaces, requiring a secure and reliable IT infrastructure. As a result, having scalable digital transformation is essential, but many SMEs may need more knowledge and finances to pursue this fully.
Environmental Uncertainty
The uncertainties introduced by the COVID-19 pandemic directly impact the availability of customers, suppliers, and markets for products or services. Besides affecting the supply chain, the uncertainty also led to a fall in consumer spending for most markets. SMEs dependent on a small group of suppliers or a specific market or group of customers are at high risk of losing their business without suitable alternatives.
Financial Crises
The economic crisis as a result of the pandemic may push many SMEs into bankruptcy. It may be difficult for SMEs to withstand a financial crisis without appropriate credit facilities and regulations. Furthermore, SMEs need a stable customer base and a supportive market to build their bottom line. But environmental uncertainty during the pandemic does not provide for that.
How Did SMEs Adapt?
In the face of a global pandemic like COVID-19, most businesses would change their business models to adapt to the situation. There is a need for well-formulated and reliable measures to keep the business resilient during unexpected disruptions. In their study, Guckenbiehl & De Zubielqui found that most startups change their business models due to crisis-induced opportunities or crisis-induced adversity. (2022)
SMEs can either adapt their current business model (business model adaptation), for example, bringing their range of products and services to the international market, or devise a new business model (business model innovation) that completely changes how the business operates—for example, closing down their brick and mortar retail to focus on online sales. (Guckenbiehl & De Zubielqui, 2022)
Depending on the size of their organizations and the influence of the crisis, SMEs may choose business model adaptation or business model innovation or a combination of both to manage the situation. When adversities outweigh opportunities, smaller startups focus on business model innovation. In contrast, larger ones are more likely to focus on business model adaptation. When opportunities outweigh challenges, the larger startups focus on business model innovation, whereas the smaller startups focus on business model adaptation. (Guckenbiehl & De Zubielqui, 2022)
In Chaturvedi & Karri’s study, the authors listed four ways that SMEs can overcome and adapt to the unstable environment brought about by the COVID-19 pandemic. (2021)
Cut Cost
More than cutting headcount, retrenchment is defined as a set of strategic activities to reduce costs and assets resorted primarily during an economic downturn. Many companies, including SMEs, turned to retrenching their staff, especially companies in industries directly affected by government regulations, such as hospitality and tourism. This phenomenon led to the highest global unemployment rate recorded in 2020 at 6.18%, translating to about 200 million people who are out of jobs (COVID Crisis to Push Global Unemployment Over 200 Million Mark in 2022, 2021). However, experienced entrepreneurs in India chose to reduce operating and overhead expenses rather than focus on staff retrenchment. Besides retrenchment, cost cutting, asset reduction, and revenue generation are other turnaround strategies to consider.
Create Strategic Alliances
Building strategic alliances can strengthen organizations, provide greater market opportunities and, at the same time, bolster the reputation of each partner in the coalition. During the Asian Financial Crisis in 1997, smaller Indonesian firms could overcome adversity because they created strategic alliances with larger firms to overcome their disadvantaged position in technology knowledge. Similarly, tie-ups with institutes of higher learning or industry experts can help SMEs during economic downturns.
Creative Product/Service Marketing
SMEs can create product differentiation by innovating their sales and marketing strategies. Using digital marketing, SMEs can focus resources on markets with high demand for goods and services. SMEs in Korea demonstrate this by strengthening their marketing activities and innovation to ensure economic growth.
Digitization
Digitization makes it possible for firms to operate nimbly, which is crucial in an uncertain environment like the COVID-19 pandemic. To continue satisfying customer and supplier needs, SMEs must transition to online services and products with new channels. They will have to start building up their technical proficiency to support new digitization norms as the future will see the increased use of social media and internet technology.
Government’s Role in Supporting SMEs
Governments play a prominent role in supporting SMEs. Besides ensuring safety, they have to ensure the availability of viable transportation infrastructure and skilled labour during the pandemic. Organizations and SMEs look to the state for support through tax incentives, loan facilities, skill development, etc. During the pandemic, governments worldwide implemented several assistance programs in reaction to the outbreak to help SMEs survive. Many countries offer various initiatives such as tax breaks and loan guarantees to aid SMEs financially. Governments have also provided salary subsidies, rent reductions, and even IT training to help SMEs continue operating during the pandemic. Governments play a significant role by providing necessary infrastructural support and creating a supportive business climate to help them weather economic downturns.
Pandemic and Beyond
SMEs had adjusted to the drastic changes brought about by the pandemic. Many have adapted new technology to maintain their operations, such as using video conferencing tools and focusing more on digital marketing. Some adopted new business models offering e-commerce and home delivery services, while others pivoted to new markets.
The pandemic certainly left substantial long-term effects on SMEs. Not only did it accelerate the shift towards digitization, but it also created lasting changes in consumer behaviours. It highlights the importance of having robust business models with the flexibility and fluidity to switch to contingency plans. Together with suitable government initiatives and assistance programs, SMEs that can adapt to these new and changing circumstances will be able to survive and even thrive after the pandemic.
If you are an SME interested in learning more about managing uncertainty, here is something for you.
References:
Chaturvedi, R., & Karri, A. (2021). Entrepreneurship in the Times of Pandemic: Barriers and Strategies. FIIB Business Review, 11(1), 52–66. https://doi.org/10.1177/23197145211043799
Guckenbiehl, P., & De Zubielqui, G. C. (2022). Startups’ business model changes during the COVID-19 pandemic: Counteracting adversities and pursuing opportunities. International Small Business Journal, 40(2), 150–177. https://doi.org/10.1177/02662426211055447
COVID crisis to push global unemployment over the 200 million mark in 2022. (2021, June 4). UN News. https://news.un.org/en/story/2021/06/1093182
Gopinath, G. (2020, April 14). IMF blog. https://www.imf.org/en/Blogs/Articles/2020/04/14/blog-weo-the-great-lockdown-worst-economic-downturn-since-the-great-depression
