Transforming Small Businesses in the Time of COVID

What we can learn from business leaders who weathered crises past.

 

John KrpanBy John Krpan
OneAccord Principal

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Someone once said necessity is the mother of invention, and they were right. It’s good to remember this, especially with COVID-19 wreaking havoc on more than just our health. It's killing business. Asked if I had ever seen this before, I said no, which was only partially true.

Let me explain.

It’s true that on this scale, we really haven’t seen anything like the broad sweeping impact caused by the COVID pandemic. For example, unless you manufacture hand sanitizer, or maybe live on a deserted island in the middle of the Pacific, it’s a good bet your business is at risk and you're struggling to retain traditional sources of revenue. This is especially heartbreaking for people who have built their business from the ground up and are now watching a life of hard work erode. If there's any good news at all, it's that we are not dealing with a completely blank sheet of paper. And this is an important point. While there are no Get Out of Jail Free cards, we can draw lessons from past years that just might garner some creative thinking to loosen the COVID chains that bind us.

For example, there were some pretty lean years when oil prices slumped and those involved may as well have been trying to sell horse-drawn carriages. Ditto for real estate bubbles or vacuums created from shifts and advancements in technology. In these cases, however, necessity reared its head and invention did, in fact, blossom.  I'm going to outline some solutions that proved effective in these difficult times. Perhaps some of them apply today.

1. Scalability

For small businesses, a business model that is viable on one scale may still be viable on a different scale. For example, a friend of mine had a handful of scuba dive shops that he had built up over many years. After a recession hit, business was down dramatically and he was struggling to keep things afloat. After a lifetime of building the business, he was reluctant to move backwards by closing any of the shops, losing market share and/or reducing hard-earned income from his established chain. However, necessity eventually dictated that all but the original store had to close. In this case, the financial result was a surprise to everyone. After a year, even though top line revenue was reduced, the profit from that one store was not far off the profit of all the previous stores combined. Loyal customers still came to the remaining shop and operating expenses from one store were dramatically less than five stores. Also, with only one business to run, the owner was able to more carefully control costs, inventory, product lines, the customer experience, etc. It was a lot easier to maximize profit with a greatly reduced scope. When the economy returned and his coffers were replenished, the owner elected to stick with the one business.

  • Lesson
    • If possible, scale your business to a size that’s realistic for the economy and allows you to put 100 percent effort into a smaller portion of the business.
  • Challenges      
    • It's hard to let go of existing business and/or loyal employees.
    • It's difficult to determine and carve off the most profitable element of the business.
    • The business may not be scalable.
  • Action            
    • Do the math on what-if scenarios for various configurations of business size.
    • Review products and services to determine which are the most profitable and/or represent the greatest amount of revenue.
    • Review products and services to determine which present the best viability in a pandemic situation.

2. Core Competence

Core competence is a hard concept for many people to grasp. When someone asks them to define their core competence, a surprising number of business owners actually miss the target. They automatically assume that their current form of business fully represents their core competence. While this is true in many cases, there are also many instances where that’s not the case at all.

For example, if you manufacture widgets, it may not dawn on you that you're actually not that good at manufacturing. Perhaps design and engineering really carries the day for you. Expanding design and engineering to other products or offering those services to other companies may be your ticket to new markets, new customers and new revenue sources. Hence, it’s important to take a critical look at what you do with the sole purpose of determining whether there are more places for you to do it.

In a real-life example, a small company that created cardboard boxes for a clothing retailer didn’t realize the potential of what they did. Their value proposition wasn’t supplying standard cardboard boxes. In fact, they had the ability to customize those boxes for a variety of purposes, which was exactly what their clients perceived as the real value. As their business in the retail space expanded and finally reached a plateau, the company desperately started looking for new customers. It wasn’t until they searched outside the clothing retail sector that they found success from several unlikely sources. Whether it was luck, fate or brilliance, it finally donned on someone that unusual product shapes presented the most likely opportunities for them. The end result? The company began to manufacture custom containers for car parts followed by containers for overseas shipments of oil equipment, such as drill bits.

In another instance, a small manufacturer of headlight covers exhausted their revenues after tapping their relatively small market. These were very simple plastic shields that were screwed on top of headlights to prevent cracks from rocks and other road debris. However, that business plateaued quickly and it never found new legs until the owner realized the company’s core competence wasn’t headlight covers at all. It was their unique approach to plastic injection molding that enabled the creation of complex shapes that could be used for a variety of other applications, such as plastic containers. Of course, finding the new markets and customers required some pavement pounding and horizontal thinking, but it was well worth the effort and resulted in a greatly increased market.

  • Lesson            
    • The business you believe you're in may not be what you're actually good at.
  • Challenge       
    • Sometimes it's difficult for owners to isolate their core competence from the status quo.
    • You may already be operating within your core competence.
    • Transition to new customers, markets or geographies isn’t easy.
  • Action            
    • Remove your blinders to enable a critical, unbiased assessment of what you really do.
    • Ask other people in the company what they think you're good at; the answer to many issues often rests with employees who have never been asked.
    • Get outside help to get an independent point of view.

3. Do More With What You’ve Got

Early in the pandemic, I spoke with a restaurant manager and asked how they were doing. I expected a pretty dire answer, but was surprised when he said they were doing well. Like many restaurants, they ensured that they were following the rules and remained open to a smaller, socially distanced clientele. However, one of the surprising sources of revenue was their supply chain. They utilized their product sources, purchasing power and established procurement process to buy, ship and sell food-related products to others. The value proposition was that others did not have the expertise for procurement, sourcing, etc., but the pandemic created the need for more people to take advantage of these networks. It was a very simply step for the restaurant to say, “Hey, we can do this for you.”

In other words, once you've established a strong core competence, don’t stop there. Carry out an exhaustive search for others who can leverage what you do.

  • Lesson           
    • Test to see if your core competence benefits — and can be sold to to others.
  • Challenges
    • None
  • Action        
    • Brainstorm potential customers for activities that are already sunk costs (i.e., sharing your delivery trucks, procuring supplies, leveraging manufacturing slack, etc.).

4. Execution

This is a boring piece of advice, but executing plans is key to business. As obvious as this seems, not everyone does it.

A services company engaged a board of directors to provide top line revenue growth. Ideas from the board were met with a resounding, “Yeah, yeah, we thought of that.” It didn’t dawn on the board for some time that, while the management team had in fact “thought about that,” they never executed. In this particular case, the team had become complacent with the business, they were worn out from years of hard work and had evolved to the point where they were unwilling to address issues with each other. The end result was this long-running company came frightfully close to shutting its doors.

It’s clear that management teams and business founders have to be honest with themselves and either (a) do self-assessments to identify barriers to execution, (b) retain outside facilitators to uncover root issues or (c) inject new people to create the energy required to remain motivated and carry out action items that will keep the company healthy.

  • Lesson
    • Complacency and lack of business plan execution contributes to failed business.
  • Challenge        
    • Familiarity within and between management teams often leads to lethargy.
    • Fatigue and boredom also contribute to a reduction in zest for getting things done.
    • Finally, some people simply can’t execute.
  • Action
    • Determine whether you have the skills within your team to execute on business plans. If not, add those skills to the team. If so, determine why plans are not coming to fruition.

5. Buy/Sell

This option provides two diametrically opposed bookends. On one hand, if there is simply no light at the end of the tunnel, an owner may opt to sell their business. On the other hand, an owner who has cash flow and sees opportunity to expand may opt to embark on a consolidation plan to buy and roll up other companies into a larger entity. In both cases, the owner needs to work with people who broker these types of activities and have access to capital, businesses for sale and businesses for purchase. Two small advertising companies provide examples of two different directions one might take.

In the first ad company, the owner realized that his operating model worked very well and he could replicate it in other companies. His challenge was finding those companies. Confident in his model, he sought out a partner to help find, fund and operate other small advertising companies. While this took some time, they eventually created a list of potential targets and methodically began consolidating small advertisers and applying the owner's model.

Conversely, the owner of the second company in this example decided he wanted to spend more time playing golf. His limitation was his loyalty to his employees, so he spent considerable effort finding a trusted source to help him sell his company with a couple of provisions: 1. The owner would play a reduced role, even though the new owners would assume full decision-making authority, and 2. the new owners would keep the employees whole, since they were the customer-facing entity that delivered revenue. Eventually, the owner found the right partner and he was able to exit his full-time role while still keeping his employees whole.

  • Lesson    
    • It may be time to either sell or, conversely, leverage a strong position to buy and consolidate other companies.
  • Challenges     
    • It's hard to let go of a business you have run for a long time.
    • The business is often not worth as much as an owner hopes.
    • In difficult economies, financing and purchasing companies and/or finding buyers can be difficult.
  • Action            
    • Determine if it’s time to (a) put on the afterburners and take advantage of a buyer’s market or (b) exit the business.
    • Spend time seeking options for buyers or sellers so you can align with a trusted party who will help you meet your goals.

6. Get Lean

This probably seems obvious, but if you are facing economic strain, leaning out the business (i.e., eliminating extraneous costs) should be one of the first things you consider. Typically, not everyone jumps on cost-cutting options, even though they recognize the need. The factors that cause procrastination are many. For example, it’s hard to tell the person who was the best man at your wedding that he's redundant.

And then there's the fact that too many people fall into the trap of treating their business like a hobby, which it often is. People may have gravitated to an element of their business that they find personally rewarding, even if it doesn't directly support revenue. In one real-world case, a business owner created a product that served as the primary source of revenue for decades. However, as the business grew, revenue shifted to a services-based operation and R&D was no longer relevant. Nonetheless, the owner had a sentimental attachment to this function and to the people who operated it. When a recession hit, the R&D budget was cannibalizing the rest of the company without adding anything to the coffers. At the eleventh hour, common sense finally prevailed and the owner largely dismantled the R&D department, allowing for re-investment into business development and marketing. This, in turn, accelerated the growth of the new services. The cautionary note here is that one size doesn’t fit all — in other situations, cutting the R&D function may be the kiss of death for a company.

  • Lesson
    • An unpruned garden weakens any business, let alone one that is struggling in a pandemic environment.
  • Challenge                   
    • Familiarity with a business tends to create a fog that makes it difficult to identify extraneous costs and even more difficult to illuminate those costs.
    • Many factors make it difficult to cut costs, even when we identify surpluses.
  • Action                        
    • Take an immediate and serious look at what you can cut from the business to survive. Often, outside help can provide a less biased and less emotional view of the balance sheet.

Summary and Context

The examples I cited here do not parallel the exact situation created by our pandemic and even if they did, it's rare to take a solution from one company and effectively port it directly over to another. Each business is unique and we must look at it as such.

There's no magic elixir that can be summoned by the snap of your fingers. However, the common thread to these stories is an approach that is likely applicable in many current situations. The trick is to create and maintain an open mind as to what might be applicable in your case, even if the examples are from another industry, situation or time period. Successful outcomes will come to those who look outside their immediate sphere and say, “Hey, I think what they did there might work here if we ____."

 

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About the Author

For more than 25 years, John Krpan has helped people improve the metrics of their business and find a path forward in complex situations. He began his career creating feasibility studies in the oil and gas industry, but his innovation and cross-systems thinking allowed him to function across a number of other business verticals including healthcare, telecommunications, finance and manufacturing.

Learn more about John here. Contact him directly at (206) 335-3102 or john.krpan@oneaccord.co