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Right-sizing: the ‘Goldilocks dilemma’ for business under Covid-19 pressure

27 July 2020 University of Stellenbosch Business School (USB)

Down-sizing may present a short-term solution to survival for businesses under the pressures of the coronavirus pandemic, but right-sizing – checking the relevance of value propositions, repurposing resources and filling gaps in customer needs – should not be overlooked as a route to longer-term sustainability.

“We all know the fairytale where Goldilocks is faced with three steaming bowls of porridge – they all looked appetising but on closer inspection, one proved to be too hot, one too cold and only one was just right.”

“For business, these challenging times call for creative solutions to cost and relationship management that are neither too hot or hastily imposed, nor too cool and distanced from the customer, but just the right size,” says University of Stellenbosch Business School (USB) managerial accounting senior lecturer Sonja Cilliers said.

There cannot be a blanket assumption that business will return to normal post-coronavirus, and without strategic thinking and planning, “a real danger exists that short-term solutions to alleviate the pressure cooker of the present may negatively impact medium- to long-range decision making,” she warned.

Business survival is top of mind worldwide, with daily announcements of leading companies in trouble – multi-national corporations such as car rental giant Hertz, $18-billion in debt, and retail chain JCPenney ($4.2-billion debt) filing for Chapter 11 bankruptcy protection in the USA in May alone.[i] Locally Edcon filed for business rescue in April, with revenue losses of R2-billion, Comair followed in May (R3.4-billion in debt), and Massmart announced earlier this month that up to 1 800 employees in its Game stores could be retrenched.

The challenges are clear in the second Stats SA survey[ii] of the impact of Covid-19 on business, published in mid-May, indicating that 9% of the 2 182 businesses surveyed across various sectors had already closed down permanently by 30 April, almost half had “paused trading” in under Level 5 lockdown in April and 30% said they would not survive a month without any turnover.

Although the follow-up survey[iii] published at the end of June showed that pressure had eased slightly under lockdown level 4, mounting cash flow problems still appeared to threaten survival, with only a third of businesses confident that they had the financial resources to continue operating through the pandemic, said Cilliers.

“If the issues faced are of temporary nature and the company finds itself in a position in which it cannot meet its financial obligations, then a process such as business rescue may be a viable option.

“For those companies that have some leeway in terms of cash management and therefore the luxury of time to plan, it would be sensible to consider two aspects: First, to deal with the immediate threat to continued operations and, second, critical analysis of the sustainability of the business model and the continued relevance of the value proposition to the customer.”

While an application for business rescue or bankruptcy protection doesn’t mean a company will necessarily be liquidated, and corporations such as General Motors and Delta Airlines have regained profitability after bankruptcy reorganisations, she said “the challenge in the wake of the Covid-19 pandemic is to determine whether the business model followed by a company is still valid”.

She said cost-cutting measures to deal with immediate cash flow problems should be done with a clear view to the direction in which the company is headed, and “where possible, organisations should aim towards a right-sizing rather than a down-sizing orientation”.
“Right-sizing requires that resources be repurposed to where the needs gap is manifesting currently. It may very well be that right-sizing the organisation may lead to increased activity in certain aspects of the business, for example products that fulfill basic needs of customers may see an increase in demand in these times. The challenge then becomes how to repurpose resources, which may range from redeployment of the workforce to the reorganisation of a production plant,” Cilliers said.

She pointed to the example of US supermarket group Whole Foods[iv] which has turned some of its physical store locations into “dark stores”, repurposing them into semi-warehouses for online order fulfilment to meet a massive increase in demand for grocery deliveries and curbside collections as customers seek physical distancing.

“The customer needs gap is filled while also providing the store with a greater margin of control over the current bottlenecks and delays suffered by delivery services,” Cilliers said.

She added that relationship management throughout the value chain will be a critical success factor to ensure the survival not only of the company, but the entire value proposition to the end user.

The loss of key supply partners “may prove to be as catastrophic to the business as is the loss of customers”, she said, pointing to the Stats SA survey1 which indicated that 53% of businesses had been unable to obtain the materials and supplies required to continue operations.

The pandemic environment means companies will have to revise forecasts and adjust budgets on a rolling basis, even though assumptions about future revenue that underlie budgeting are particularly challenging with customer spending patterns impacted by decreased income, changing needs and physical impediments to purchasing.

“Revenue assumptions drive production or service costs and in many cases, these costs are fixed over the short term. Even where costs are seemingly locked in, managers will have to think about renegotiating terms, repurposing and rescaling activities. If businesses can access their relationship capital without resorting to a formalised business rescue exercise, they may be able to garner a larger amount of control and flexibility as to the way forward,” Cilliers concluded.


[ii] COVID-19: Nine in ten businesses report reduced turnover | Statistics South Africa, 14 May 2020.
[iii] Business under lockdown: Pressure might be easing | Statistics South Africa, 25 June 2020.

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