Masters of Disasters? How Small Firms Can Master the COVID-19 Crisis
The COVID-19 crisis, only a few months old, already has had a devastating effect on the global economy. As of April 23, 2020, 26.5 million jobs were lost in the US alone. So far, global stocks have seen a downturn of at least 25%. Goldman Sachs predicts the US Gross Domestic Product to shrink 24% in the second quarter of 2020 and forecasts a major contraction in manufacturing, with reduced domestic demand for non-food goods, reduced foreign demand for US goods exports, supply-chain disruptions and plant closures. In response, governments around the world released massive stimulus packages. The US so far approved $2 trillion to combat the economic downturn and EU finance ministers recently approved €500 billion in stimulus measures.
Small and medium sized companies (SMEs), in most countries defined as organizations with less than 250 employees, are the backbone of every economy across the globe. In the US, SMEs make up 99.7 percent of U.S. employer firms and create 49.2 percent of jobs in the private sector. SMEs drive innovation and competitiveness and account for 44 percent of U.S. economic activity. So, a suffering economy largely means suffering SMEs and their employees.
Even though economies around the globe depend on SMEs, this firm type is especially vulnerable to resource shortages (may it be human, financial, intellectual or other resources). In other words, the smaller they are, the less resources they control and the more vulnerable they are if they lose and cannot access these resources anymore. And startups, as a special form of SME, are not only often small, they are also new. Being new means lacking an established business model, having no or only limited legitimacy and oftentimes being dependent on cooperating with other organizations. This puts SMEs — and in particular startups — under special pressure in times of crisis.
So, what can these firms do to overcome a crisis, such as the current pandemic? A recent research project found 69 studies that researched SMEs in times of crisis and disaster. These 69 studies revealed impacts on different business areas, looked at different types of crises and disasters and covered different geographies (see graphics below, I am happy to share the full list of studies).
According to the 69 studies the three areas that SMEs need to focus on are finance, strategy and their role in the macro environment.
The first area, finance, deals with the most obvious consequence of a crisis: the lack of funding, typically caused by lower revenues and/or stricter investment policies. Given SMEs’ vulnerability to external shocks, it is not surprising that banks perceive small firms as risky when making investment decisions. Innovative SMEs are particularly disadvantaged in this regard. From an investor’s perspective, innovative SMEs seem to present a special form of risk: Not only is the firm itself threatened, it also attempts to invest in innovative, that is uncertain, business outcomes.
This is particularly controversial since other studies, in the area of strategy, found that being entrepreneurial is particularly helpful in times of crisis. Entrepreneurial thinking does not only help with creating new products or adapting these to changing customer needs, it also helps when restructuring the entire organization. Even more so, these studies find that entrepreneurial behaviors can only be executed if the company has enough (financial) resources available. This is either because of the higher costs associated with proactively creating innovative offerings or because a limited amount of resources increases the risk perception of managers and entrepreneurs (if only a limited amount of resources is available, they might consider it even more risky to invest those into projects with an uncertain outcome). Blending entrepreneurship with a focus on customer needs is a useful strategy as well. Still, it requires resources, and these are oftentimes not available to SMEs in crises. Despite the negative impacts crises can have, they also tend to create opportunities for SMEs that typically can be exploited through entrepreneurial behaviors. In the end, SMEs face the dilemma that entrepreneurial behavior (“proactive innovating”) has the potential to increase performance and help survival in times of crisis, but that crises and disasters limit the amount of resources needed to execute such strategies. For SMEs, there apparently is a strategy/funding chicken-and-egg-problem. From this perspective, governments need to focus even more attention on emergency funding programs for SMEs.
The literature study points to another interesting concept that is potentially helpful for overcoming crises and disasters: Expertise. Entrepreneurial expertise supports so called effectual thinking and behavior. Effectuation is a relatively new approach that offers different ways of overcoming highly uncertain situations. If the future is highly uncertain and therefore unpredictable (the future apparently is always unpredictable but less so for companies with an established business model, product portfolio and customer base and more so for an innovative startup), effectuation assumes that planning for the future is useless. Instead it suggests that working in the present with currently available resources will create some sort of future for the organization. This is supported by only investing limited amounts of resources in a trial-and-error style to figure out the best course of action, working closely with partners and having a mindset that turns negative outcomes into something positive for the company. Working with an effectual mindset in times of crisis seems to be useful for SME managers and entrepreneurs. Still, effectuation rests on entrepreneurial expertise, so the question is how young and unexperienced managers or entrepreneurs can use effectuation to their advantage.
Currently, articles published in the popular press or on social media discuss how the COVID-19 crisis will change the way we live and work (click here for a good overview). This change will largely be driven by small and medium sized organizations (either for or non-for-profit) that create innovative solutions for problems in their environment. These problems were either created by the COVID-19 crisis or even made this crisis possible, for example through the overpopulation in areas or the destruction of natural resources. Representing more than 99% of all companies, SMEs have a special role in the macro environment when it comes to creating a path forward.
