Enterprise resilience and what it means for Malaysian SMEs
The outbreak of Covid-19 at the beginning of the year has quickly turned the attention of businesses from continued growth and prosperity to survival. On March 18, the government implemented the Movement Control Order (MCO) to try to curb the pandemic and this has been extended beyond six weeks. As a result, businesses have closed, meetings and travel plans been cancelled, and various other restrictions have since brought many businesses to the brink of collapse.
The impact on SMEs
Small and medium enterprises (SMEs) are the backbone of the Malaysian economy — comprising 98.5% of all business establishments in Malaysia, contributing nearly 40% to GDP and employing almost two-thirds of the workforce. For many of these SMEs, the MCO has had a disproportionate impact on their business viability. Their small-scale operations and focused (non-diverse) business activities mean that closing their doors has resulted in major losses. Many are not positioned to absorb and manage an economic shock of this magnitude.
The government has announced economic stimulus and Prihatin packages to “cushion” the impact of the pandemic and to “reinvigorate” the growth of the Malaysian economy. More than RM110 billion have been allocated to programmes such as the Enhanced Wage Subsidy Programme and the SME Automation and Digitalisation Facility to support businesses, including SMEs, during this challenging period. However, relying solely on the government during a time of crisis may not be the answer.
SMEs frequently focus on growth in market share as their main driver of strategic decisions. High-growth strategies typically leave little room for economic shocks and disruptions. As such, many SMEs have not planned for or invested in their own resilience, nor in technology and digital solutions that can enable a stronger competitive positioning in the long run. Some reports have shown that over 85% of SMEs have yet to fully embrace digital solutions, which is key to long-term competitiveness.
Enterprise resilience is defined as the capacity of a company to survive, adapt and thrive, even in the face of business stress or acute shocks. Covid-19 is potentially creating a new normal for the economy, giving rise to an increased demand for digital business models, an agile workforce, a reorientation of supply chains and shifting consumer behaviours. Given these changes, it is imperative for SMEs to prioritise resilience in their operational and strategic planning.
To assess their resilience readiness, SMEs should look into nine functional categories: supply chain and global trade; employee health and well-being; talent and workforce; customer and brand protection; financial and investor; risk; government and public policy; technology and information security; and insurance and financial recovery.
SMEs will need to consider the operational and strategic implications of these nine functional categories across four business priorities:
1. Employee safety is the top priority. Employees are the most important assets of any business and, in a crisis, safety, health, well-being, care and job security become immediate concerns for individuals. Companies therefore need to steady the ground and help transition people into new ways of working.
2. SMEs must ensure business continuity. The Covid-19 pandemic has disrupted business operations, supply chains and economic trade in all industries. During this time, businesses can easily lose clarity on what their customers require, as buying behaviour shifts quickly and, in some cases, dramatically, and ripple effects emerge. Businesses will need to rapidly assess, respond to and recover from these and other disruptions.
3. SMEs must also secure liquidity. The Covid-19 pandemic has disproportionately impacted highly leveraged businesses and those with low cash buffers. SMEs need to know where their stress points will be and continually assess the liquidity impact on the full range of recovery scenarios over the coming months.
4. Lastly, SMEs must engage their stakeholders. As businesses reshape their organisations in response to the challenging circumstances, stakeholder engagement will be more important than ever. Otherwise, businesses risk losing the confidence of their customers and vendors, and risk negative long-term financial and operational implications. SMEs must understand the most important priorities to their respective stakeholders and build a targeted plan of engagement and communication to maintain their confidence and trust.
Possible future scenarios
There remains great uncertainty over how quickly economic recovery will take place and whether there will be any major structural changes to long-term growth. Hence, to further strengthen enterprise resilience, SMEs should prepare for each of these scenarios.
1. The most optimistic scenario is one in which measures to contain the pandemic and prevent the economy from sustaining structural damage have been successful. In this scenario, the GDP growth projection would show a V-shaped recovery with a steep drop due to the MCO, followed by a steep recovery and return to the previous economic growth trajectory.
2. Another scenario, which is the most probable, is where there is a resurgence of outbreaks arising from new infected clusters, resulting in the government reinstating the MCO. In this scenario, the GDP growth projection will go through multiple V-shaped recoveries, modelling the shape of a saw, with a pronounced economic drop in output for each instance of the virus resurgence.
3. The third scenario is where the pandemic has been successfully contained through a prolonged MCO. Economic intervention measures have also been introduced and new ways of conducting business have emerged. In this scenario, the GDP growth projection has a U-shaped recovery profile, in which there is a near-term loss from the prolonged MCO and where companies have undertaken severe cost-cutting measures to stay afloat.
4. The worst-case scenario is where the pandemic continues to plague both Malaysia and the rest of the world, and the economy suffers permanent structural damage. Ineffective policy responses could lead to political instability and social unrest. GDP growth, in the worst-case scenario, would follow an L-shaped profile, depicting a severe and prolonged recession.
SMEs will need to understand and estimate the impact of each of these scenarios on their businesses and consider these scenarios across each of the nine functional areas of resilience, mapping out plans of action and business responses with a near to long-term view. The sooner SMEs prepare to address and embrace the new normal, the sooner they will be ready to not only survive the new world order but also find new opportunities and thrive.