The Economics of Isolation : Companies caught cold (Part 2)

Recall the days when you fell sick; the overwhelming tiredness experienced by your frail body, every action conducted begrudgingly and sluggishly as inertia became punishing. Your systems were down and in need of urgent repair or reboot. You could still function, but only a fraction of what your once healthy body was capable of. This struggle of an impaired ability to perform and sustain was experienced by businesses and companies during the pandemic. These legal entities were brought down by the pandemic like a stubborn cold (pun intended). 

This article will explore the effect of quarantines, isolations, and the pandemic on 4 important organs of any business — HR, Finances, Production, and Marketing — to better understand how businesses were affected during the pandemic. 

The industrial sector was uniquely affected during the pandemic, particularly due to complex supply chains and high-scale manufacturing. Mckinsey analyses 5 stages that display how businesses reacted to the coronavirus spread. These 5 stages explore the reactions of industrial and automotive sectors in particular. 

The first stage, Resolve, marks the time when businesses have to make difficult decisions pertaining to production facilities, finances, and spending and laying off workers. After trying to forecast and gauge the implications of their decisions and the duration of the pandemic, businesses take certain initial measures such as prioritizing worker safety. This stage is followed by the Resilience stage, wherein businesses cope with quarantines and lockdowns and try to ensure their survival.. This includes managing short-term liquidity, altering the supply chains, and planning and providing for contingencies.

The Return stage (third stage) occurs when businesses try to adapt to the new normal during the pandemic by the way of restarting operations and taking all necessary precautions to ensure worker safety. In this stage, firms slowly open up their factories and try to get production and operations back on track. The last two stages, Reimagination and Reform, tackle the issue of preparing for the post-COVID scenario — changing business strategies to minimize supply chain risks, improving workforce flexibility, increasing local outsourcing, etc. This includes a fundamental shift in the way businesses approach technology, marketing, sourcing, and worker roles. 

These stages broadly outline the chronological approach of business to these unforeseen circumstances. However, it is crucial to understand the decisions taken by the business heads about the various aspects of running a business. 

Production: 

In the intricate integrated production method followed today by most industries with heavy outsourcing and dispersed production facilities, a substantial blow was expected in the pandemic. The globalized and scattered supply chain was in peril as countries went under lockdown, transportation came to a staggering halt and raw materials were rejected due to health concerns. Amidst this confusion, businesses had to revise their production strategy with changed priorities; hygiene over profits, and speed over costs. 

The massive hit experienced by businesses made them realize the massive risk in their supply chain models with excessive dependence on a single supplier. The new strategy aimed to reduce this risk and ensure the reliability of production and supply. This meant exploring local, more expensive sources also due to fears of the virus being transmitted through international channels. Micheal Taylor (chief credit officer for the Asia Pacific) says “Ensuring supply security by enhancing the strength of supply chains will become the overarching objective of governments and companies, overtaking cost and efficiency considerations”. This has led to a glocalisation trend in the business world — “In science, we are discussing a new concept: Glocalisation. This is referring to the combination of globalization and local sourcing. It is important not to lose sight of local sourcing and therewith a better guarantee for supply”. 

HR: 

Quarantines and isolations sparked mixed reactions from the HR department. Businesses resorted to a careful concoction of measures to manage their employees. The ingredients? Work from home, layoffs, pay cuts. As employee health became a top priority for businesses, most workers who could continue working from the confines of their home switched to the work from home model. Unfortunately, this meant that a lot of workers, whose nature of work prevented them from providing their services remotely, were laid off. “A survey by naukri.com revealed that at least 1 in 10 Indian jobseekers have confirmed that they have been laid off and nearly three in 10 jobseekers fear a layoff is imminent.

While businesses initially did not consider work from home as a viable default option, now many businesses are beginning to observe the upsides. The HR department has particularly felt emancipated from geographical limitations in their hiring process as now they can hire professionals from all across the country (or even the globe). This has given the department unprecedented access to the most qualified applicants for the job. 

Managers are witnessing a rise in employee productivity; as workers spend less time in hectic commutes, or socializing at the office, they are getting more work done at home. According to a study conducted by Poverty Action Lab of call centre employees, employees working from home performed significantly better than comparison employees working in the office; they worked 9.2 per cent more minutes per day, made 13 per cent more calls per week, and answered forty more calls per week relative to the office employees. They attributed this difference to having a quieter environment at home and reported having a more positive attitude and less exhaustion from work than the comparison group. Employees are enjoying the work-from-home life; they get to spend more time with kids and save money and time on commute; to the extent that 44% of workers would take a 10% reduction in salary to continue working from home. 

The work from home model gives a significant advantage to both the employer and the employee: flexibility of working hours. If anything, the pandemic has reinforced the importance of flexibility in a business environment. Providing flexible working hours allows employees to optimize their time and work when they are at the peak of their efficiency and not distracted by other factors. It also enables them to spend quality time with their family without compromising on work. Businesses will ultimately reap the benefits of this elevated productivity and perhaps even a fall in the employee attrition rate. However, there is a major security challenge that accompanies these advantages. At the office, all work done on computers was easy to secure. At home, securing employee’s personal phones and computers is a complication. Without these security measures, businesses run the risk of losing confidential information or being hacked.

Finance: 

If a company is sick, one of the first symptoms will be displayed by the company’s accounting statements. Cash flow or profitability will take a hit when a company is not doing well for itself. 

At the onset of  the pandemic (and even presently), both took a hit,  which is why maintaining financial health and business liquidity became  an urgent requirement for surviving the pandemic. An article in the Economic Times reads “Any further shock to aggregate demand may exacerbate the fragility of the Indian corporate sector, weakening its profitability and cash flows.”

Cash flow and liquidity were an obstacle for many businesses as falling demand, interrupted supply chains and rising immediate costs created a cash crunch. Accenture conducted an analysis of the Altman Z-scores of S&P 500 companies, which showed that 210 companies were in the distress zone in late March 2020. The distress zone implies that the companies face a considerable risk of insolvency in the near future. 

To escape this conundrum of cash, businesses tried to renegotiate their contracts and delay payments to suppliers and creditors. As for Bank Loans, the loan moratorium announced by the RBI provided liquidity relief to small and medium-sized industries as they received a 6-month extension on their EMI payments. While opting for this moratorium was not the most profitable option, it reduced the urgent need for cash. 

The cost structure changed for many companies as well. When the supply-chain was disrupted, businesses had to look for other manufacturers and suppliers, preferably local ones, which were likely to be more expensive alternatives. There were additional costs of operation associated with maintaining hygiene and sanitation; sanitizing manufacturing facilities, providing PPE suits to workers, etc. Some methods of natural cost-cutting offered a little relief — reduced travel expenses, closed offices, and laying off workers. The work from the home model also aided some cost-cutting as many employees accepted a small pay cut, given how they too were saving money on commute amongst other things. In a late May Townhall, Mark Zuckerberg clearly implied that the work from the home system will go in tandem with reduced salaries. 

A clear reassessment of the cost structure will give a clearer picture of profitability. While on average costs have risen, the changed consumer habits have made it difficult to predict the exact effects on the Profit and Loss statements. 

Marketing and Promotions: 

A great many changes have been made to the marketing mix. The 4 P’s of marketing — Product, Place, Price, and Promotion — have adapted to the challenging scenario. 

Distribution channels have changed during the pandemic. Businesses are exploring direct-to-consumer channels, particularly through online shopping options on their websites, as the transportation restrictions are making it difficult to retail via longer channels. The other alternative remains going through big-box e-commerce websites for national shipping and free home delivery options for local businesses. Social isolation in particular has ignited the trend of contactless deliveries which is followed by food delivery services like Swiggy and Zomato, along with other local businesses. 

In particular, promotion strategies have gone through a complete overhaul. With changed consumer priorities, the advertising strategies needed a revamp. Promotions and advertisements now try to connect with consumers on a more human-level given the strong humanitarian aspect of the pandemic. According to Fortune Magazine, “Connecting on a human level could ultimately result in stronger customer loyalty even when lower-cost or more convenient providers come along because people end up feeling “recognized,” ”. This is also seen in the form of increased CSR activities that are advertised to tap into the humane side of consumers and gain support. With this, businesses are looking at fostering long-term relationships with their consumers. They are optimistic that consumers will remember the brands that made their lives better during these difficult times. 

A particular promotional trend followed by most companies is the ‘assured safety’ trend. Given the increase in health concerns, businesses seek to assure their consumers that their products are safe and sanitary to use (read: COVID-free). Particularly businesses that produce/retail edibles or are involved in services that would involve human interaction are following this method of advertising. Some businesses have adapted their product to suit these requirements — safer packaging, contactless services, etc. 

Pricing trends are harder to follow as they depend heavily on the product and how the industry is coping with it. With falling incomes, supply-chain issues, and changing consumer trends, demand and supply changes are simply too difficult to follow. While not much can be said yet on prices at an average, one change pertinent to payments is easy to observe. To avoid human contact, online payment has gained traction. More businesses are accepting digital payments via mobile wallets and other online payment services on average. Reports predict that digital payments will rise by an additional 6% by 2022 than predicted due to the pandemic. 

The decisions taken during the pandemic are of vital importance, not only to ensure the survival of a company but also to chart out its future course and direction. Many of the lessons learned during the pandemic are here to stay with the CEOs and managers. These last few months have fundamentally changed how organizations operate and strategize. As the pandemic continues, businesses will continue to grow and evolve. Like any sick patient, each business will try new medication and herbal remedies; some will work, some will not; but at the end of the day, each will end up building a stronger immune system.

Advaita Singh is a second-year Economics and Finance student at Ashoka University.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s